HFT will have minimal impact in the FX space

13 July 2012

According to Patrik Säfvenblad, Investment Partner at Harmonic Capital Partners, despite the industry-shaking, headline-making, flash-crashing repercussions in equities, the impact on FX markets will be more of a rolling thunder than a lightning strike, not at least in part due to the lessons learned from watching equities.

Dan Mellins-Cohen, Editor of The TradeTech Blog caught up with Patrik to find out more…

Some commentators claim that FX trading is currently where Equities was five years ago. Do you think this holds true?
No. The two markets are just too different to be compared. Most importantly FX is homogenous (roughly 20 currencies traded), while equity is not (thousands of traded equities). The most important development looking forward is related to credit risk and related regulatory issues. We might see all FX trades move to clearing house solutions in the future. This would be an enormous change for liquidity provision (since all counter parties would have the same credit).

How swiftly do you think development will happen, particularly in light of oncoming regulations?
We take small steps every day, but it’s often a case of two steps forward and one step back. Just as in equity trading, there will be no well defined 'revolution'.

With FX moving increasingly into the HFT space, what new business models are you seeing develop?
I see no new business models developing. Scalping is not new, and short term liquidity provision is not new either. Liquidity providers will protect themselves from abusive, big frequency trading using various types of gates.

What effect do you think these models will have?
I believe high frequency trading will have minimal impact in the FX space. No real change to liquidity provision and no real change to transaction costs. (This is clearly different from equity markets where high frequency trading has had a large negative impact on structural liquidity, but of course increased short term liquidity.

How do you expect the new regulations (EMIR, MiFID II, Basel III, etc.) will affect your IT infrastructure and what are your recommendations for preparing for these changes?
It will mean that we have to make 'normal' changes to our systems. We do not foresee this being a problem, rather a natural evolution of trading and systems.

In your panel at TradeTech FX you will be discussing how to asses where you can access primary liquidity to avoid a mirage of liquidity: What are your top tips for spotting what is and is not a ‘mirage of liquidity’?
For small tickets it is easy enough for us. Just trade and see what happens. For larger sizes, the only way is to constantly talk to the final liquidity providers. They will have many ways of offering their liquidity, with each channel having its own price and depth. Trying to infer liquidity from observing the market is impossible, so relationships are very important.

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