As Foreign Exchange trading continues its rapid growth, new technology has enabled Forex traders to borrow and adapt techniques of High Frequency Trading, also known as automated trading and algorithmic trading, from the equities markets that spawned them.
Foreign Exchange trading, depending on which statistics you believe, is producing average dollar volume of around $4 trillion per day and estimates are that High Frequency Trading accounts for 30 to 50% of this volume. algorithmic trading or automated trading, offers some distinctive advantages for traders who prefer to conduct trading activities with multiple brokers to octane the best liquidity, lowest spreads and fastest order execution. There are additional benefits to trading with multiple brokers, using more than one data source, trading platform or currency pair.
With High Frequency Trading, having more than one broker enables you to detect if a broker is front running, which is, jumping in just ahead of you in order to negatively affect your fill price. Multiple price data streams permit the trader to compare the prices of a particular currency pair and trade with the most advantageous source. Using more than one trading platform permits the user to customize automated trading scripts and expert advisors to play to the strengths of those platforms.
Finally, Foreign Exchange trading needs to have diversification. Trading multiple currency pairs allows the trader to reduce risk by taking advantage of the tendency of correlated currency pairs, such as the EUR/USD and the AUD/USD to trend in the same direction, or negatively correlated pairs such as the EUR/USD and the USD/JPY to move opposite each other.
High Frequency Trading has benefited the Foreign Exchange trading arena as a whole through pushing spreads lower as a result of generating huge levels of buy and sell orders at the milliseconds speeds only possible with modern, high-speed automated trading technology. The individual trader or small trading shop further benefits from the property of algorithmic trading that eliminates emotional influences that cause premature, delayed or simply poor human trading decisions.
High Frequency Trading strategies seek to capture small profits, sometimes thousands of times per minute. Automated trading can examine, consolidate and analyze news events that drive currency prices much faster than traditional sources such as television, radio, standard news feeds or even the Internet.
When combined with a low latency news feed, algorithmic trading can deliver data involving market moving events such as interest rate decisions, inflation figures, industrial production and others in as little as 2 milliseconds, then generate indicators or make trade recommendations to an automated trading system. This translates into something all traders want to gain: an edge.
Foreign Exchange trading, once the exclusive province of governments, international banks and multinational corporations thus becomes available to the individual investor, allowing them to participate against these large entities on equal terms.
Low latency infrastructure combined with multiple brokers, algorithmic trading strategies and extremely fast, low latency news feeds makes High Frequency Trading accessible for Foreign Exchange trading activity to those who otherwise might be left at a serious disadvantage. Even longtime, successful discretionary traders should not turn a blind eye toward the automated trading protocols that will continue to exert an ever-growing influence on Foreign Exchange trading and would further be well advised to explore the possibility of incorporating automated, High Frequency Trading into their Forex repertoire.
Jubin Pejman, Founder of FCM360, is an industry leader for Financial Services Technology Facilitation. FCM360 specializes in establishing high-performance IT infrastructures for Financial companies to gain connectivity to mission-critical exchange markets. Learn more about FCM360's financial colocation services.
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