THANKS TO THE RISE OF HIGH FREQUENCY TRADING in foreign exchange markets, many smaller banks have found themselves squeezed out of buying and selling major currencies like the euro and the British pound. Those banks are concentrating on higher-profit trades in emerging-markets currencies and developing other businesses where they have a competitive advantage.

High frequency traders have had the same effect on foreign exchange that the conversion from eighths to penny increments had on equity trading, says Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. Major currency pairs now get quoted to an extra decimal point. For combinations such as the U.S. dollar and the euro, that means banks are trading on thousandths of a euro cent.

“We found that....