BIS Committee Report on HFT Sheds Light on Many Issues

By mosesbet · Filed Under Market News Comments Off on BIS Committee Report on HFT Sheds Light on Many Issues 

Bank for International Settlements (BIS) Committee recently released a 31 page report on high frequency trading (HFT) in forex market. The report sheds light on a number of issues that indicate the insufficiency of current HFT monitoring initiatives and the need for further analysis by both participants and regulators.

Importance of HFT specific analysis

According to Icap Electronic Broking chief executive David Rutter, the report offers a much needed analysis of a forex market element that is increasingly becoming more important. He emphasizes the importance of HFT specific forex market trend examination and believes that the report will dispel certain common myths like high frequency traders disappear in difficult times, and that they are never additive and only take liquidity from the market, which are inaccurate factually.

The report questions the ability of high frequency traders to provide genuine and sustained liquidity under various market conditions. It also stresses the need to examine the effect of such activity on traditional participants. Although under normal circumstances HFT offers benefits like narrower spreads and more activity, it may bring down the resilience of the whole structure during difficult times by decreasing the participation of traditional players like major banks, which can be significant stabilizing presence in volatile situations.

Concerns about commercial incentive prime broker pricing

To regulate HFT activity via Traiana’s Harmony CreditLink platform, 4 major forex brokers joined hands with prime electronic communications networks. BIS in its report raises concerns about commercial incentive prime broker pricing practices as they try to retain HFT clients, while acknowledging the potential advantages of the initiative. Whether or not any risk mitigation initiatives including this will be effective in preventing major brokers from trying to make more money from higher trading volume by offering services at lower costs remains to be seen.

 

In its conclusion, the report urges regulators to keep up with the latest developments as increase in HFT activity is likely to have a significant impact on the global forex market functioning and structure. The Wholesale Markets Brokers’ Association chairman David Clark opines that flash crash risk is much higher in equity markets than forex markets. He also warns policy-makers against over interference as it can hurt liquidity.

 

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