Yesterday Dow Jones newswires broke the story that Thomson Reuters had opened an investigation into the activities of one of the biggest high frequency trading firms in the FX market, Lucid Markets. On the surface, it was yet another tale about predatory pricing behaviour from these tech savvy vultures.
It only added further fuel to those in the market that believe such participants add little value to the FX markets and should be weeded out, identified and banished. The story also quoted Lucid’s founder Dierk Reuter, as saying that "Lucid Markets values its multiyear relationship with Thomson Reuters. Lucid Markets is collaborating and aiding the review conducted by Thomson Reuters."
According to the Dow Jones report, Lucid had been connected up to several of its market data servers at once, which breached rules of the trading platform which helped ensure “fair market access.” Reuters confirmed today that an investigation is taking place, but it declined to comment any further.
Whether or not Lucid has broken any rules, is however, something of a side story in the bigger picture of how high frequency traders interact in today’s FX markets, because more and more, high frequency trading has become an essential fabric of the system, rather than a parasite.
As a result, FX exchanges are currently going through a process of quite considerable change and reconfiguration. Icap’s EBS platform has led the way in this reform this year, after it had faced mounting commercial pressure from its client base to eradicate loopholes in its system, a situation where HFT firms can prosper.
The impending launch of another FX exchange, TraFXpure, is another example of this reconfiguring of high frequency trading. By implementing so-called randomisation of market data and the orders that flow into the platform, the tactic of employing multiple connections, such as in the Reuters example, will be made redundant.
In talking with many of the leading players in electronic FX today, it is clear that Reuters has been caught on the back foot by this reform process. Meanwhile, EBS has stolen the march by putting in many of the checks and balances that these nimble high frequency trading shops seek to take advantage of. They have rewritten rules, changed pricing protocols, and importantly, formed industry consultations on how to the marketplace should operate in a fair manner.
One e-commerce head at a large FX bank says: “Reuters has been caught on the hop here. They haven’t been doing any of this and they haven’t even formed a forum with the major participants that trade on their platform to start a discussion on what they need to do.”
The consensus view among many of the market participants that Euromoney spoke to today is that the Reuters platform lacks suitable platform controls and its rules are both ambiguous and convoluted.
“If you went through all of the top 100 names that trade on the platform, almost of all of them would be breaching something or other, because it’s even impossible to know how things have been done,” says another e-commerce specialist. “It’s a poor platform, and it would have been a perfect opportunity given the change in sentiment to engage and work with the industry in closing out these loopholes.”
Yesterday’s news, therefore, may have backfired on them. Indeed other participants may now be much more reticent about engaging with Reuters and helping them fix their platform. Furthermore, if the rules that governed the platform as ambiguous as everyone seems to say they were, surely there will be other HFT firms pulled from the woodwork.
But naming and shaming will be pointless, until the underlying problem is solved. Every serious FX player in the world will access information from Reuters, EBS, CME or other venues like Hotspot, and try and access information as quickly as possible across the breath of liquidity. It is considered normal business practice.
What the Lucid story really highlights is that Thomson Reuters needs to realise that it is being left behind, and it needs to catch the same EBS and TraFXpure wave, and quickly.