The Fifth Decimal Point

As we in the US equity markets wait for real fixes to our broken market, other asset classes and other countries are starting to make strides to combat high frequency trading and some of its damaging effects.  We would like to point out two examples of some changes that others are making:

1) The Foreign Exchange market – currently, most electronic currency trading platforms allow trading with up to 5 decimal points.  EBS, owned by ICAP, is an electronic inter-dealer currencies-trading platform.  According to the WSJ , since they switched to five decimal points, their larger bank clients have been complaining that EBS has allowed “trading behavior that seemingly favors so-called high-frequency traders in recent years.”  EBS has decided that the  “last number will now be available only in increments of five, removing most of the finer price points that work best for high-speed computer-based traders. Bloomberg has quoted a few market participants saying that this represents a major change in how currencies are traded.  Graham Davidson of the National Australia Bank said “This is probably on the back of feedback from client banks and will make it an easier marketplace for manual traders and a more difficult one for high-frequency trading firms.

2) The Canadian equity market – Canadian regulators have recently passed a “trade at” rule that goes into effect on October 10, 2012.  Under the new Canadian rule :

– Visible orders will have execution priority over dark orders on the same marketplace at the same price

– There must be a minimum level of price improvement for orders to trade with dark orders

Above are two examples of market centers and exchanges starting to take matters into their own hands.  They have heard from their members and are now acting.  These changes represent some of the first steps to bringing back confidence in our markets.  While HFT proponents in the US equity market keep trying to delay any real reform so they can squeeze out every last drop of profits, others are acting to restore confidence.  The US equity market was the trailblazer for HFT but it is now just a bystander watching as confidence continues to erode.