High Frequency Trading in FX: Open for Business

By Sang Lee
Extract from Aite Group’s Report:
High Frequency Trading in FX: Open For Business

While there is certainly a growing market demand for low latency trading infrastructure within the FX market, the FX market is relatively slow compared to the U.S. cash equities market (where the accepted level of latency has fallen below hundreds of microseconds), typically operating in the hundreds-of-milliseconds range. Still, continuing efforts to eliminate precious milliseconds off matching engines and trading infrastructure have led to most firms being able to develop internal trading latency levels of single-digit milliseconds. Unfortunately, the globally distributed nature of the FX market with three major FX centers – New York, London, and Tokyo – has made it tough to alleviate latency caused by physical distance. As a result, depending on the location of the trader and the matching engine, latency levels can vary widely from less than 15 milliseconds (i.e., local transaction) to close to 300 milliseconds (cross-border transactions). In the short-term, basic latency issue is faced by all market participants. As a result, most firms have focused on addressing the three major technology areas to address the latency issue:

– Network optimization;
– Low latency connectivity; and
– Colocation/proximity solution.

In addition to the obvious latency struggles, traders in the global FX market face more pressing issues, driven largely by the fact that the FX market is still an OTC marketplace. Consequently, high frequency traders must overcome the following barriers to ensure that their trading needs are met:

– Decentralized, highly fragmented across numerous single bank and ECN execution venues;
– Unregulated for the most part, with lack of an industry benchmark and best execution obligation;
– Venue-specific market structure and communication standards;
– Lack of a comprehensive, consolidated view into the entire market; and
– Dispersed price discovery process.

A trader attempting to trade even a very liquid currency pair might need to capture market data from numerous locations scattered around the different time zones to ensure optimal trading execution. Balancing between the inherent distance latency hurdles and decentralized nature of the FX market is not a simple chore. For most of the large high frequency trading firms, solving the market fragmentation and latency issues has meant mostly internal development with close cooperation between FX ECNs. In recent years, however, a few technology service providers have emerged to provide trading infrastructure to facilitate those firms looking to jumpstart in FX high frequency trading. The rest of this section provides brief profiles of two sample vendors focused in the high frequency FX market. High Frequency Trading in FX: Open for Business APRIL 2010


Founded in 2008, MarketFactory’s core business is developing and maintaining asset class-agnostic marketplaces. However, given the level of FX expertise that reside within the three founders (all senior ex-EBS employees), initial focus has turned to addressing the technology issues in the global FX market. With more than 16 employees, MarketFactory targets hedge funds, proprietary trading firms, global banks, and ECNs.

Key products from MarketFactory include the following:

– Sherpa Connect. Designed for those clients looking to replace or develop FX infrastructure, Sherpa Connect provides low latency connectivity to FX ECNs.
– Whisperer. Whisperer is designed specifically to address the issues associated with the globally distributed reality that exists in the FX market. Whisperer is ideal for those clients that have already developed their FX infrastructure with connectivity to execution venues. A MarketFactory client would install the Whisperer software at the various data centers close to execution venues, allowing relevant market data to flow back to the client in real-time so optimal trading decisions can be made regardless of the location of the execution venues, thereby largely eliminating the issues associated with distance-based latency. By combining Sherpa Connect with Whisperer, MarketFactory attempts to address both the latency issue and the problems stemming from the globally distributed nature of the FX market.

Source: Aite Group