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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I dined behind the Houses of Parliament in my sexually connected foursome

My wife and I would sometimes dine out with another couple. We did not always check the significance of the date. 

I am self-employed and find that working from home, setting your own schedule, the days generally blur into each other, with weekends holding no significance, and public holidays, when those who are employed in factories, offices or shops get time off, meaning nothing. I am often surprised to go out and find the streets empty of traffic because it is some national day of observance, such as Christmas, that I wasn’t aware of. I find myself puzzled as to why the shops are suddenly full of Easter eggs or pancake batter.

Growing up in a Communist household, we had a distinct dislike for this kind of manufactured marketing opportunity anyway. I remember the time my mother tried to make me feel guilty because I’d done nothing for her on Mother’s Day and I pointed out that it was she who had told me that Mother’s Day was a cynical creation of the greetings card monopolies and the floral industrial complex.

Valentine’s Day is one of those I never see coming. It’s the one day of the year when even the worst restaurants are completely booked out by couples attempting to enjoy a romantic evening. Even those old-fashioned cafés you’ll find still lurking behind railway stations and serving spaghetti with bread and butter will tell you there’s a waiting list if you leave it late to reserve a table.

In the late 1980s my wife and I would sometimes dine out with another couple, he a writer and she a TV producer. One particular place we liked was a restaurant attached to a 1930s block of flats, near the Houses of Parliament, where the endless corridors were lined with blank doors, behind which you sensed awful things happened. The steel dining room dotted with potted palm trees overlooked a swimming pool, and this seemed terribly sophisticated to us even if it meant all your overpriced food had a vague taste of chlorine.

The four of us booked to eat there on 14 February, not realising the significance of the date. We found at every other table there was a single couple, either staring adoringly into each other’s eyes or squabbling.

As we sat down I noticed we were getting strange looks from our fellow diners. Some were sort of knowing, prompting smiles and winks; others seemed more outraged. The staff, too, were either simpering or frosty. After a while we realised what was going on: it was Valentine’s Day! All the other customers had assumed that we were a sexually connected foursome who had decided to celebrate our innovative relationship by having dinner together on this special date.

For the four of us, the smirking attention set up a strange dynamic: after that night it always felt like we were saying something seedy to each other. “Do you want to get together on Sunday?” I’d say to one of them on the phone, and then find myself blushing. “I’ll see if we can fit it in,” they’d reply, and we would both giggle nervously.

Things became increasingly awkward between us, until in the end we stopped seeing them completely. 

This article first appeared in the 25 May 2017 issue of the New Statesman, Why Islamic State targets Britain

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