banking and capital markets
April 10, 2012
HFT Pushes Small Banks Away from Major Currencies
The rise of high frequency trading in foreign exchange markets is pushing bid-ask spreads ever narrower. As a result, many smaller banks can no longer turn a profit by trading major currencies like the euro and the U.S. dollar.
By Charles Wallace
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.
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