Foreign exchange platform puts the brakes on high-frequency traders

EBS has changed its rules to discourage algobots.

EBS, a major interbank trading platform in in the foreign exchange market, is considering imposing a major change in the way it runs its market in order to discourage high-frequency trading from taking place.

EBS currently runs on the principle of "first in, first out" trading, where trades are dealt with in the exact order they are made. That is the way most people expect the market to work – but it also gives an advantage to those who can get their trades in quickest. That leads to the arms race that high-frequency trading has seen in the last few years, where traders pay to place their servers close to the exchange, to whittle off those last few microseconds.

Instead of this model, EBS is considering bundling together incoming trades and dealing with them in a random order. That way, every trade that came in in (for example) the tenth of a second between 12:00:00.0 and 12:00:00.1 would be grouped together and dealt in a random order, removing the advantage that the trader who got in at 12:00:00.01 would normally have.

Speaking to the FT, the chief executive of EBS explained why the company has made the decision:

The first twenty years of algorithmic trading have added great transparency and led to the compression of spreads – all great things. But there is a line beyond which marginal speed and smaller trade sizes add no value and actually harm the markets. At some point we, the public markets across asset classes, crossed that line.

The ‘first in, first out’ model sounds fair and plausible, but in modern public markets it implies ‘winner takes all’.

The classic example of how high(er)-frequency trading can have positive effects comes from the fact that the desire to shave seconds off the response time to financial information is the reason why the undersea cables linking London to New York are so high quality. Without that motivation to profit, the cables might not have been laid for decades after, and certainly wouldn't be as fast as they are now. (In fact, the USD/GBP exchange rate is still known as "cable" now, after the first transatlantic cable laid in 1858).

But as the speed of trades has increased ever higher, the side-benefits are shrinking. The difference in liquidity between a market where a tenth of a second and a thousandth of a second matters is minuscule; even if spreads might be a tiny bit tighter than they otherwise would be, no normal trader is helped by that "improvement".

So EBS's speed limit is a welcome step. By dealing with trades in a semi-random order, it removes the incentive to spend millions on shaving off the smallest fractions of time. Ironically, the companies which will benefit most in the short term are the high-frequency traders themselves, who already have the technology to trade speedily, and now don't need to worry about investing more on ever-diminishing returns. But eventually, more and more traders will match that capability, until the market becomes a level playing field again.

The other reason why traders – even high-speed ones – ought to thank EBS is that if the exchanges get HFT under control, then there's one less reason for governments to step in. Discouraging high-frequency trades is one of the strongest reasons for introducing a financial transaction tax. That hits everyone, not just the speedy traders.

A new data-centre in Manhattan. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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The Future of the Left: trade unions are more important than ever

Trade unions are under threat - and without them, the left has no future. 

Not accepting what you're given, when what you're given isn't enough, is the heart of trade unionism.

Workers having the means to change their lot - by standing together and organising is bread and butter for the labour movement - and the most important part? That 'lightbulb moment' when a group of workers realise they don't have to accept the injustice of their situation and that they have the means to change it.

That's what happened when a group of low-paid hospital workers organised a demonstration outside their hospital last week. As more of their colleagues clocked out and joined them on their picket, thart lightbulb went on.

When they stood together, proudly waving their union flags, singing a rhythmic chant and raising their homemade placards demanding a living wage they knew they had organised the collective strength needed to win.

The GMB union members, predominantly BAME women, work for Aramark, an American multinational outsourcing provider. They are hostesses and domestics in the South London and Maudsley NHS Trust, a mental health trust with sites across south London.

Like the nurses and doctors, they work around vulnerable patients and are subject to verbal and in some cases physical abuse. Unlike the nurses and doctors their pay is determined by the private contractor that employs them - for many of these staff that means statutory sick pay, statutory annual leave entitlement and as little as £7.38 per hour.

This is little more than George Osborne's new 'Living Wage' of £7.20 per hour as of April.

But these workers aren't fighting for a living wage set by government or even the Living Wage Foundation - they are fighting for a genuine living wage. The GMB union and Class think tank have calculated that a genuine living wage of £10ph an hour as part of a full time contract removes the need for in work benefits.

As the TUC launches its 'Heart Unions' week of action against the trade union bill today, the Aramark workers will be receiving ballot papers to vote on whether or not they want to strike to win their demands.

These workers are showing exactly why we need to 'Heart Unions' more than ever, because it is the labour movement and workers like these that need to start setting the terms of the real living wage debate. It is campaigns like this, low-paid, in some cases precariously employed and often women workers using their collective strength to make demands on their employer with a strategy for winning those demands that will begin to deliver a genuine living wage.

It is also workers like these that the Trade Union Bill seeks to silence. In many ways it may succeed, but in many other ways workers can still win.

Osborne wants workers to accept what they're given - a living wage on his terms. He wants to stop the women working for Aramark from setting an example to other workers about what can be achieved.

There is no doubting that achieving higher ballot turn outs, restrictions on picket lines and most worryingly the use of agency workers to cover strikers work will make campaigns like these harder. But I refuse to accept they are insurmountable, or that good, solid organisation of working people doesn't have the ability to prevail over even the most authoritarian of legislation.

As the TUC launch their Heart Unions week of action against the bill these women are showing us how the labour movement can reclaim the demands for a genuine living wage. They also send a message to all working people, the message that the Tories fear the most, that collective action can still win and that attempts to silence workers can still be defeated.