High-Frequency Trading Raises Post-Trade Stakes in FX

Post-trade functions will become more important in foreign exchange (FX) trading operations as the FX market evolves through greater use of high-frequency trading, according to participants who attended the FX Week USA conference sponsored by Incisive Media.

"Processing trades faster is essential to enhance the flows that are coming," says Jill Sigelbaum, executive vice president, global bank sales and alliances, at post-trade technology processing provider Traiana, who spoke on a conference panel. "Now people are trading partly electronically and partly using voice. Asset managers are trading using prime brokers because they want to execute electronically."

Greater adoption of electronic execution in FX trading will improve participants' ability to scale operations, according to panelist Craig Leveille, director of FX products at CME Group. "When we had a surge in volume last May, you could look at our hybrid model with a trading pit and electronic trading platform and see that the pit volume grew but reached its limits with having more traders and brokers coming in. However, volume on [the CME’s trading system] Globex grew and still could have scaled 10 times more. That's where we all need to go, because that's definitely where our opportunity is."

Besides the lines between voice and electronic trading blurring in FX, the distinctions between retail and institutional trading systems are also blurring, according to Sigelbaum. "One of our biggest focuses right now is to look at the risk implications and see what we can do from a network perspective," she explains. "We try to solve problems that the individual participants can't solve on their own, where a network of people is required. We bring all the players together and centralize that."

These changes in FX will be driven by a climate where currency trading will become an asset class on par with equities or real estate, predicts panelist Daniel Shaffer, president and CEO of Shaffer Asset Management. "Every country will have an exchange of some sort that they have to clear through," he says. "The trading will ... not be as risky as it is right now."

FX traders are getting a better handle on high-frequency trading, but "the banks had to bring it to a place that's more comfortable from a risk and processing perspective," says Sigelbaum. "It will grow in a way where people are more comfortable with their exposure and ability to handle all the volume of transactions coming through the environment."