Speed restrictions give FX market participants the hump
Speed bumps appear to be gathering favour among stock exchanges, but their potential to level the playing field in the FX market is tempered by concerns around transparency and the impact on trading costs.
Eurex recently revealed it will impose a speed limit on fixed-income options trading from December, while it was reported in the Wall Street Journal that Cboe Global Markets was looking at introducing a brief delay on one of its equities exchanges.
Speed bumps are nothing new – many banks use them – but their potential imposition on FX exchanges has caused alarm in some quarters.
For example, Kevin Kimmel, global head of e-FX for Citadel Securities, describes the proposals by equities exchanges to implement asymmetric speed bumps as harmful to equity markets.
“They would be similarly harmful and counterproductive in the FX market, which has recently made significant progress towards limiting last look,” he says.
If speed bumps are enforced by market participants to manage their liquidity to deter loss-making order flow, remaining market participants will be left to absorb this ‘toxic’ flow, according to Point FX CEO Henry Wilkes.
“Faced with an increase in loss-making trades, they will widen their spreads, making it more expensive for everyone to trade,” he says.