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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Russian pools, despatches from the Pole, and disagreeing with my son Boris on Brexit

My week, from Moscow to Westminster Hour.

With the weather in Moscow last week warm, if not balmy, I thought about taking a dip in the vast heated open-air swimming pool that I remembered from a previous visit. My Russian host shook his head. “That would have been the great Moskva Pool. Stalin actually tore down the Cathedral of Christ the Saviour to make way for it. But, after perestroika, they filled in the pool and rebuilt the church!” So I didn’t have my open-air swim, though I did visit the cathedral instead.

In the evening, spiritually if not physically refreshed, I addressed a gathering of Russian businessmen and bankers who were keen to learn what impact Brexit might have on the London property and investment scene, the UK being a prime destination for their money. We met in the old Ukraina Hotel, now splendidly refurbished and relaunched as the Radisson Royal, Moscow. A Rolls-Royce Silver Wraith was parked in the foyer, a snip at £150,000. “There is a great democratic debate going on in Britain at the moment,” I told my audience. “The issues are finely balanced. I’m for staying in. But on 23 June, the British people, not the politicians, not the tycoons, nor the lobbyists, will decide.”

I noted some uneasy laughter at this point. Russia’s fledgling democracy probably still has some way to go before matters of such moment are left to the people.

 

Culture club

I spent the next afternoon in the Tretyakov Gallery. A rich businessman, Pavel Tretyakov, collected thousands of items of Russian art (mainly icons and paintings) and donated both them and his magnificent house to the state in 1892. Over time, the state has added many more artefacts, including some from the vast storerooms of the Hermitage Museum in St Petersburg.

My guide, Tatiana Gubanova, a senior curator, had recently organised the loan of several items from the Tretyakov to London’s National Portrait Gallery, where they are currently still on display in the splendid “Russia and the Arts” exhibition. She said that she was looking forward to returning to London next year: “The Royal Academy is planning a special exhibition to celebrate the 100th anniversary of the Russian Revolution.” Whatever happens at the political level, it is good to know that our cultural links with Russia are still flourishing.

 

Heading south

Just before I left for Moscow, I attended ­Adrian Camrose’s funeral in St Bride’s Church, off Fleet Street. The scion of a great newspaper family, Adrian made his mark as the Daily Telegraph’s science correspondent.

In early 1984, I went to Antarctica with him. We shared a cabin on a British Antarctic Survey ship while it visited research ­stations “down south”. I was writing a book on Antarctica, subtitled “the Last Great Wilderness”, while Adrian sent a series of crisp despatches to the Telegraph via the ship’s radio-telex. Adrian’s dateline was “On board the John Biscoe, Antarctica”. Distant galaxies were Adrian’s consuming passion. I am sure he is filing stories from the spaceship Spacey McSpaceFace even as I write.

 

Green surge

As co-chairman with Baroness (Barbara) Young of Environmentalists for Europe, my life has been fairly hectic recently. I am sure it will get more so as the referendum day approaches. I know perfectly well that one of the reasons the invitations to speak or write articles ping into my inbox is the titillation factor. Are Families Divided on the Referendum? Is “Boris’s Dad” (that’s me!) going to Disagree with Boris?

Notwithstanding the family relationship, which I deeply treasure, the answer is “yes”. I am going to disagree. Boris and Michael Gove and other key members of the Brexit team have injected a wonderful level of vigour and energy into the referendum debate. They have raised issues, besides the economy, which needed to be discussed, particularly sovereignty, immigration and the EU’s general direction of travel. For this, the nation owes them a debt of gratitude. That said, I am convinced that this is not the moment to call time on the UK’s membership of the EU. As I see it, the best way to address the obvious problems is not to leave the EU but to “Remain” and to fight for change from within. In the end, this will benefit not just the UK but Europe as a whole.

 

Quiet no more

Last Sunday evening, I took part in the BBC Radio 4 programme Westminster Hour. My fellow panellists were the former work and pensions secretary Iain Duncan Smith and Baroness Smith of Basildon, formerly Angela Smith MP, now the shadow leader of the House of Lords.

We had a very lively and sometimes rowdy discussion. IDS is the “quiet man” who, since his resignation from the cabinet a couple of months ago, has regained his voice in no uncertain terms. Baroness Smith, a delightfully unpushy lady, sometimes found it difficult to get a word in edgeways. I don’t think I did so well myself.

But I did, I hope, make it clear that, from my point of view, there was still time to build on all that was good in the EU (such as its environmental record), while seeking common rather than unilateral solutions for the problems that persist.

On 24 June, if the Remain side wins, the government should go into action in Europe with all cylinders firing and with our politicians and diplomats working overtime, to get the arrangements that we need and deserve. On the way out, IDS said to me, “It won’t work. They won’t have it.”

He may be right. But I still think we should give it a go. You don’t file for divorce as a result of a single tiff, not after more than 40 years of marriage.

On the issues of immigration, for example, and possible changes to the EU’s freedom of movement rules, we may find more allies in Europe than we think.

Stanley Johnson is co-chairman of Environmentalists for Europe: environmentalistsforeurope.org

Stanley Johnson is an author, journalist and former Conservative member of the European Parliament. He has also worked in the European Commission. In 1984 Stanley was awarded the Greenpeace Prize for Outstanding Services to the Environment and in the same year the RSPCA Richard Martin award for services to animal welfare. In 1962 he won the Newdigate Prize for Poetry. He also happens to be the father of Boris Johnson.

This article first appeared in the 26 May 2016 issue of the New Statesman, The Brexit odd squad