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.

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How Theresa May is trying to trap her opponents over Brexit

An amendment calling on MPs to "respect" the referendum outcome is ammunition for the battles to come. 

Theresa May is making a habit of avoiding unnecessary defeats. In the Richmond Park by-election, where the Liberal Democrats triumphed, the Conservatives chose not to stand a candidate. In parliament, they today accepted a Labour motion calling on the government to publish a "plan for leaving the EU" before Article 50 is triggered. The Tories gave way after as many as 40 of their number threatened to vote with the opposition tomorrow. Labour's motion has no legal standing but May has avoided a symbolic defeat.

She has also done so at little cost. Labour's motion is sufficiently vague to allow the government to avoid publishing a full plan (and nothing close to a White Paper). Significantly, the Tories added an amendment stating that "this House will respect the wishes of the United Kingdom as expressed in the referendum on 23 June; and further calls on the Government to invoke Article 50 by 31 March 2017". 

For No.10, this is ammunition for the battles to come. If, as expected, the Supreme Court rules that parliament must vote on whether to trigger Article 50, Labour and others will table amendments to the resulting bill. Among other things, these would call for the government to seek full access to the single market. May, who has pledged to control EU immigration, has so far avoided this pledge. And with good reason. At the Christian Democrat conference in Germany today, Angela Merkel restated what has long been Europe's position: "We will not allow any cherry picking. The four basic freedoms must be safeguarded - freedom of movement for people, goods, services and financial market products. Only then can there be access to the single market."

There is no parliamentary majority for blocking Brexit (MPs will vote for Article 50 if the amendments fall). But there is one for single market membership. Remain supporters insist that the 23 June result imposed no conditions. But May, and most Leavers, assert that free movement must be controlled (as the Out campaign promised). 

At the moment of confrontation, the Conservatives will argue that respecting the result means not binding their hands. When MPs argue otherwise, expect them to point to tomorrow's vote. One senior Labour MP confessed that he would not vote for single market membership if it was framed as "disrespecting Brexit". The question for May is how many will prove more obstructive. 

George Eaton is political editor of the New Statesman.