Forex Scandal Drives Shift to Algo Trading | Hacker News Reader

Forex Scandal Drives Shift to Algo Trading

wsj.com

31 pointsjackgavigan32 comments

I've written FX trading algos, and I don't think it's so much to do with the fixing scandal.

For a long time now, FX has been a low margin business. It's just a guy on the end of a phone. Now they can't even use their one advantage, which is knowledge of flow, because of regulations about prop risk. So that guy on the phone, he's being replaced by a robot. At the end of the day, what does a market maker do? He provides prices and tries to keep risk steady. You can easily (*tm) write a program that does that.

The fixing thing, sure, it means something. It means you lose another income source, because now everyone will be afraid of getting caught. And rightly so.

But the writing was on the wall for the FX traders for a long time. Pretty much every trade under a few million bucks is done by a machine. To justify a phone call you're looking at maybe 30MM USD minimum. If you want to hide your trading, you can probably break up your big trade with an algo. It's also likely that if you have a big order, the guy on the desk is just hitting an algo as well.

Another benefit of automation is you get a load of data about how things are going. The banks will phone you and complain if they are losing money on your flow. They have stats about how profitable all the clients are. And they know if you are gaming their hedging algo.

I really doubt the figure that only 15% of trades were done by algo a year ago. Maybe a few jumbo orders skew it, but by ticket numbers I would think over 80% of trades are on some sort of automation.

> I really doubt the figure that only 15% of trades were done by algo a year ago. Maybe a few jumbo orders skew it, but by ticket numbers I would think over 80% of trades are on some sort of automation.

I'm inclined to agree with you. The article seems to conflate "algo" and electronic trading, which doesn't help matters. In my experience, the majority of FX trades are just straightforward deals at spot - no algo required. It's only when you've got a really big deal that you want to spread out to avoid moving the market, or where you need to execute at the fixing, that an algo would come into it.

> "A year ago, algo orders placed by fund managers and other investors accounted for no more than 10-15% of total trading volumes.."

To my mind "trading volumes" refers to the amount being traded, rather than the number of trades, so maybe he means that the value of the algo orders amounted to 10-15% of the total value of all trades (e.g. ten algo trades for $5m each vs one voice trade for $500m).

I think you have to weight by trade size. If you didn't, I'd say 99.999% of all trades are algo.

Yes, but even by trade size, the 15% figure is suspect. Perhaps central bank intervention is done by mega-trade on phone. But even your huge hedge fund is going to be able to execute their B+ trade on an algo.

Is there any good information out there on what's happened recently with the garbage end of the Forex market?

I feel like I noticed the existence of this sector of finance primarily a few years ago because my spam folder stopped being about "v1agra" and Nigerian Prince scams and suddenly 90% the email scams there were about Pips and Forex algorithms.

Not really sure what you mean. But as far as trading forex, it's relatively cheap and easy (as these things go as regulation in most jurisdictions is either lax, or non-existent) to set up shop and quite lucrative. The majority don't actually settle trades, they just match their book and trade the rest naked. Because, let's face it, it's pretty much guaranteed that almost all retail trades will blow out their accounts. I wouldn't let my money anywhere near those sleazy bucketshops.

To be slightly clearer, what I mean is that in, say, the mid to late 2000s, most of the spam email I saw was inducements to buy fake or generic or otherwise illegal prescription drugs.

Nowadays, by volume most of the spam I see seems to be trying to get people to sign up for trading "secrets" or algorithms or free pips, largely focused on Forex markets.

I wonder what changed in the world of weird spam scams to make the content shift in that way.

I'd have to guess that it's a more profitable market. I'd assume far more people are likely to be persuaded to try their hand trading since they can make a million dollars in only a couple weeks with little risk and only $1000 down! A lot of shops have introducing broker or similar programs where you sign-up clients for them and get a cut of the spread for every trade or commission or similar. Has the benefit of not being illegal, and, free money!

What value do you produce for people when trading forex via algorithms? Honest question.

Some people have yen but want to buy things, like a tanker full of oil, priced in dollars. There once existed a specialized profession of very expensive middlemen who would facilitate this transaction. The transactional costs would have paid for a nice house. Computers can do it for a tenth the price, saving money for folks in the non-finance economy when they're doing things that the non-finance economy very urgently wants them to do.

Well, if someone wanted to buy something in another currency, they'd have to exchange their currency. This is done at a teller window for small transactions(you're going on vacation), but done on the exchanges for large transactions(someone wants to buy 100M USD in Oil with their Euros.)

Another common trade is turning foreign currency profits into your local currency to reduce exposure if that foreign currency is particularly volatile and/or the majority of your expenses are in your local currency.

Banks really just don't have that kind of money on hand. Nor should they, the forex market is trillions a day.

Before, these sorts of transactions were done via voice, but traders were using them to manipulate the fix rate[1][2]. Now, banks are taking humans and fraud out of the equation by just going from 100M transaction to algo.

1. https://en.wikipedia.org/wiki/Forex_scandal

2. http://www.cftc.gov/idc/groups/public/@newsroom/documents/fi...

It's a whole lot cheaper than paying a guy in suspenders to talk to you.

I worked for 5 years as a software engineer at a forex hedge fund, contributing to the development of their algorithmic trading system. This shift started long before the forex scandal broke. Many different financial markets are becoming increasingly automated, and banks are developing their own trading algorithms in order to keep up.

That's buy-side, a different kettle of fish.

We were indeed on the buy-side, but we traded with the banks on the sell-side, which we observed becoming increasingly automated.

Here's a great explanation of the forex market development and rigging:

https://medium.com/bull-market/oranges-and-lemons-the-fx-sca...

unfortunately this is behind a paywall... :(

Just Google the title, and try the link in the Google results.

Reading it is an FAQ:

https://h4labs.wordpress.com/2015/09/14/hacker-news-faq-1-ho...

archive.is is your friend.

Sssh!! You're not allowed to mention the paywall.

It isn't a question of "not allowed", but of tedium. More than half the comments in this thread are paywall complaining or responses thereto. Meanwhile the actual article isn't hard to read, as many users have pointed out. This is just the kind of noise that we added that guideline to dampen. HN would be worse off without these articles, and better off without these comments.

Full text: https://archive.is/lY4Yz

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lol no thank you

Why post links that are behind a paywall? This needs to be downvoted.

It may be a great article but why post it here if nobody cannot read it?

"Complaints about paywalls are off-topic in HN comments."

https://news.ycombinator.com/item?id=10178989

Anyone who is a subscriber can read it. Is there some rule that HN posts must be available to freeloaders?

Yes.

Are paywalls ok?

It's ok to post stories from sites with paywalls that have workarounds.

https://news.ycombinator.com/newsfaq.html

A [paywall] warning will have been polite. :(

All articles at wsj.com are behind a paywall. As other comments have pointed out, you can get past the paywall through google.

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