HFT is changing the ecology of the foreign exchange markets - BIS

HFT is changing the ecology of the foreign exchange markets - BIS

High frequency trading is changing the ecology of the foreign exchange markets, with implications for its resilience in times of stress, a high-level central bankers' committee has concluded.

The Bank for International Settlements Markets Committee finds that HFT could be seen as beneficial for the functioning of the FX markets in normal times, but that it may provide an echo chamber to volatility in other markets.

"The May 2010 "flash crash" in equities suggests that pure HFT (in contrast to algorithmic execution involving large unidirectional trades) is not by nature a trigger of systemic risk, but that it may have the potential to propagate shocks initiated elsewhere," states the report. "However, the different nature, structure and size of the FX market may make a flash crash-type event less likely in FX than in equities."

Many of the "predatory" or "unfair" practices attributed to HFT in FX are, in fact, not new, the report's authors suggest. A key question is whether and how other market participants such as traditional market making banks are adapting to the presence of HFT.

"Anecdotal evidence suggests that HFT participants are not necessarily flightier in volatile markets than traditional FX participants, although the latter's incentive and ability to provide liquidity have changed in the presence of HFT," states the report.

The true impact of HFT on FX markets is an evolving phenomenon, the report concludes, suggesting that regulators keep a watchful eye on developments as traditional market participants and electronic trading platforms adapt to the new ecology.

Full report:Download the document now 473.1 kb (PDF File)

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