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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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.