JetTrader 

For the pure retail trader, there are probably only three places they can go to escape most of the Bucket Shop tactics

care to point out the three places? that would help a lot of the forum members...

for those that might be wondering... a yard = billion ... and yes, retail is in no way trading yards... but if I was a "retail" customer with a $100 million in the bank (like that guy from east hampton and his atm receipt) .. and the ability to trade a few yards in terms of notional value, I wouldnt be trading the underlying and rather trading vanillas and exotics (KIKO's/RKOF/etc) with a desk like CS/DB/MS/GS/etc., vs. a bucket shop, that would give me access to close to EBS rates... so "retail" definition can vary widely as well...

everything else, I agree with and I have tried to get others to see it as well...

JetTrader 

Unless the super (do-it-to-the-max) hedge funds all decide to become high frequency sources of bid and ask in "retail" FX, then the impact if any will be negligible at best. If you want to know how the money flows into and out of FX then you will probably want to stay on top of the Triennial BIS Report: https://www.bis.org/publ/otc_hy1011/triensurvstatannex.pdf. The one thing I noted about the HFT report above, is that it never "defined" HFT from a technical standpoint. Anyone can be HFT, depending on the definition and the truth is retail FX, since the 90's has had what one could call HFTs. What the report did not put into perspective was the relationship to number of trades to notional value. If that analysis had been done, then it would have been clear in the report that: 1) HFT has been in retail FX for quite some time now, and 2) The projected increase for retail FX according to BIS in 2007, would have easily accounted for the influx of these new HFTs. As you already know, all of FX is OTC. From the Institutional Platforms down to your basic PayPal Bucket Shop FCM, accepting and opening accounts that allow traders to trade with "$1." (I actually ran across a Bucket that advertised this the other day - believe if or not). So, most of the HFT class that the report refers to will have opening balances that will afford them to "trade-up" so-to-speak and onto a either low-end institutional platform (really a high-end FX retail broker), or a straight-up institutional platform using a PM to access a more realistic pool of FX liquidity, that is closer to true Interbank that anything a pure retail FX trader will ever see. And, that brings up another point. Most (the vast majority) of current retail FX traders who think they are trading "Interbank Rates" because the marketing company disguised as a Retail FX Bucket Shop told them so, have no idea that neither their Bid, nor their Ask, ever sees the light of day in the real Interbank. And, that is because (as you know) all of the FCM/Retail Broker/MM platforms are receiving "dealing rates" through their "dealing desk" (whether they say they have one or not) that come from a proprietary liquidity pool under contract with that FCM or Retail Broker. Real interbank transactions move in Yards, notional values that are simply beyond the credit reach of the retail FCM crowd. So, they 'make a market' for the smaller retail trader, algorithmically generate their spreads to appear "stable" and promise their proprietary liquidity pool a certain "volume" per day/week/month/year, while on the other hand they promise their customers (retail traders) "guaranteed low spreads and lightening quick STP execution" - which is a totally misleading statement about what's really going on behind the scenes. This brings up the issue of how the FCM/Retail Broker goes about "off-setting" the trade to their proprietary pool. More like handing-off, than real off-setting, because each one of these guys are basically taking the other side of the trade and acting as counter-party, before any off-set happens - if the truth be told. All the while, the small retail guy thinks that he's really dealing on Interbank. One would need a PM for that, or one would need to become a bank, which is highly unlikely. However, after saying that - if you look at these proprietary pools under contract with each retail shop, you will note that for the most part they are all eating from basically the same table. Those transactions are just not being centrally housed and there is no central clearing. To demonstrate this, you can go visit the Divisa Capital FX website (a retail FX intermediary) and compare its list of liquidity providers to say, that which you would find on the FXall institutional platform. They share some of the same sources of liquidity, but not under the same contract. So, I don't expect much impact at all from the influx of HFTs, because I don't expect any of them to go running to their nearest PayPal enabled retail FX broker, which is where they'd have to end up in order to impact the average retail trader. I don't have anything against retail traders, I was one for a very long time and I still have 5% of my funds on a retail platform for other purposes not related to production trading. I just don't appreciate how the retail side of the business has set out to hurt the smaller traders by using tactics that undermine the success of the retail trader. For the pure retail trader, there are probably only three places they can go to escape most of the Bucket Shop tactics, but I'm almost certain the HFT types the report refers to, won't fit that trader profile and should be able to escape by way of initial starting balance, a I stated earlier. Nice thread, good question. Cheers!

From Zerohedge:

Just like right after Fukushima the USDJPY waited for the illiquid 5pm session to collapse, here comes part two. Have the FX HFT algos now completely taken over? A 100 pip move is catastrophic for most levered FX desks. It is time someone figured out what is casuing these periodic plunges. Sure enough, someone will gobble this up and hopefully make some money, unless there is actual news that just sent the Yen to near all time record highs.
[IMG]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/draghi/USDJPY_0.jpg[/IMG]
And another perspective:
[IMG]http://www.zerohedge.com/sites/default/files/images/user5/imageroot/draghi/6J%20poof.PNG[/IMG]

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I used to read his posts... But i'm starting to believe that the guy zero hedge is probably full of hot air. He makes too many assumptions about things which i really don't believe he knows anything about. Every post he makes is " this is the end of a world", and then he posts these fancy falling off a cliff charts. In the end, nothing materializes.

Michael.H 

I used to read his posts... But i'm starting to believe that the guy zero hedge is probably full of hot air. He makes too many assumptions about things which i really don't believe he knows anything about. Every post he makes is " this is the end of a world", and then he posts these fancy falling off a cliff charts. In the end, nothing materializes.

I don't know the extent of Tylers knowledge on various subjects but he does post a lot of doom and gloom that's for sure.

kbit 

I don't know the extent of Tylers knowledge on various subjects but he does post a lot of doom and gloom that's for sure.

Doom/gloom, gossip, etc - its what sells papers, magazines, no reason internet is different.

Mike

In theory, HFT is easier with forex than with stocks or futures. All the stock HFT guys are in the Nasdaq building and competing with each other. Same with the futures guys in the CME building. Forex doesn't have a building but the banks all trade through the same network (SWIFT?). If you opened broker-dealer accounts with a number of banks ($5M a pop) and set up a server near the data hub (Virginia for SWIFT), you'd see the bids/offers ms. before the NY banks and you could easily front-run them.

Dennis H 

In theory, HFT is easier with forex than with stocks or futures. All the stock HFT guys are in the Nasdaq building and competing with each other. Same with the futures guys in the CME building. Forex doesn't have a building but the banks all trade through the same network (SWIFT?). If you opened broker-dealer accounts with a number of banks ($5M a pop) and set up a server near the data hub (Virginia for SWIFT), you'd see the bids/offers ms. before the NY banks and you could easily front-run them.

you you really should educate yourself before posting this kind of stuff...

sysot1t 

you you really should educate yourself before posting this kind of stuff...

Okay, please educate me. I'm a noob here (although hardly a noob to trading) and I'm always eager to learn new things.

PS, I have a friend who's doing HFT forex but I'm only making a WAG about how he does it. For obvious reasons, he won't say much other than the $5M/bank thing.

sysot1t 

you you really should educate yourself before posting this kind of stuff...

agreed!