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 was wrong about Help to Buy - but I'm still glad it's gone

As a mortgage journalist in 2013, I was deeply sceptical of the guarantee scheme. 

If you just read the headlines about Help to Buy, you could be under the impression that Theresa May has just axed an important scheme for first-time buyers. If you're on the left, you might conclude that she is on a mission to make life worse for ordinary working people. If you just enjoy blue-on-blue action, it's a swipe at the Chancellor she sacked, George Osborne.

Except it's none of those things. Help to Buy mortgage guarantee scheme is a policy that actually worked pretty well - despite the concerns of financial journalists including me - and has served its purpose.

When Osborne first announced Help to Buy in 2013, it was controversial. Mortgage journalists, such as I was at the time, were still mopping up news from the financial crisis. We were still writing up reports about the toxic loan books that had brought the banks crashing down. The idea of the Government promising to bail out mortgage borrowers seemed the height of recklessness.

But the Government always intended Help to Buy mortgage guarantee to act as a stimulus, not a long-term solution. From the beginning, it had an end date - 31 December 2016. The idea was to encourage big banks to start lending again.

So far, the record of Help to Buy has been pretty good. A first-time buyer in 2013 with a 5 per cent deposit had 56 mortgage products to choose from - not much when you consider some of those products would have been ridiculously expensive or would come with many strings attached. By 2016, according to Moneyfacts, first-time buyers had 271 products to choose from, nearly a five-fold increase

Over the same period, financial regulators have introduced much tougher mortgage affordability rules. First-time buyers can be expected to be interrogated about their income, their little luxuries and how they would cope if interest rates rose (contrary to our expectations in 2013, the Bank of England base rate has actually fallen). 

A criticism that still rings true, however, is that the mortgage guarantee scheme only helps boost demand for properties, while doing nothing about the lack of housing supply. Unlike its sister scheme, the Help to Buy equity loan scheme, there is no incentive for property companies to build more homes. According to FullFact, there were just 112,000 homes being built in England and Wales in 2010. By 2015, that had increased, but only to a mere 149,000.

This lack of supply helps to prop up house prices - one of the factors making it so difficult to get on the housing ladder in the first place. In July, the average house price in England was £233,000. This means a first-time buyer with a 5 per cent deposit of £11,650 would still need to be earning nearly £50,000 to meet most mortgage affordability criteria. In other words, the Help to Buy mortgage guarantee is targeted squarely at the middle class.

The Government plans to maintain the Help to Buy equity loan scheme, which is restricted to new builds, and the Help to Buy ISA, which rewards savers at a time of low interest rates. As for Help to Buy mortgage guarantee, the scheme may be dead, but so long as high street banks are offering 95 per cent mortgages, its effects are still with us.