Electronic trading systems: The end of the machines
Ultimately, reports of their demise will prove premature. But the extraordinary volatility seen in FX over the past few weeks has highlighted some issues with the machines, or electronic trading systems as they are more properly known.
I have received numerous reports about the poor liquidity on various ECNs, and several of the leading banks have been extremely inconsistent in their pricing. Of course, they are fully entitled to adjust their spreads to the prevailing market conditions, but from what I hear and see, many of the alternative trading venues, such as Oanda and Saxo, are consistently quoting better prices.
I have also received lots of propaganda about the merits of various business models. Those who have effectively agency businesses are telling me that the market has shown the worth of their offering, as it is too volatile for smaller outfits to warehouse the risk they are having to take. Those who run principal models tell me that the banks themselves are shying away from the market, and their clients are only getting the prices they do because of their appetite to hold positions.
As for the banks, they are struggling to get orders done. An old colleague of mine says that I may have seen similar movements back in the day, but now there is no liquidity. Programmed risk management is all very well, but, to put it bluntly, programs don’t have balls, so prices are being chased to get orders filled.