World Economy

Traders Elbow Their Way Into Currency Markets

Traders Elbow Their Way Into Currency MarketsTraders Elbow Their Way Into Currency Markets

High-speed electronic market making, already widespread in stocks, is getting a grudging welcome from currency markets. They don’t have much choice.

Algorithmic traders have more than tripled foreign-exchange volumes over the last three years, seizing opportunities as Wall Street banks withdraw from currency dealing, according to Aite Group, a consultant in Boston. The new group of market makers is trading almost $200 billion a day, Bloomberg reported.

While that may seem small in the context of the sprawling global currency market, consider this for perspective: Stock trading on all US exchanges totals about $270 billion a day.  

From Citadel Securities LLC, which boosted foreign-exchange volumes 83% in the first half, to Global Trading Systems LLC, which has tripled activity since the UK’s Brexit decision, to Jump Trading LLC, which says it plans to expand its direct market making, nonbanks are racing to provide more currency liquidity.

“Market participants can keep the status quo and remain in the past or they can choose to evolve, roll with the punches and get with the times,” said Sara Wardell-Smith, global head of foreign-exchange trading and sales at Wells Fargo & Co. in San Francisco. “As long as the pricing, service and capabilities are there, why wouldn’t we consider these alternative liquidity outlets?”

Critics contend that high-speed firms can’t be trusted to stick around when times get tough—they cite Michael Lewis’s depiction in “Flash Boys” of high-frequency traders using advanced computer networks to outrun other market participants.  For all their secrecy, electronic market makers are quick to refute these allegations. They say they’re reviving liquidity in an industry that seized up in the wake of a price-rigging scandal that was caused by banks, not firms like theirs.

Electronic market makers, which make sure customers can buy and sell when they want to, argue that they’re providing much-needed liquidity, or the ability to trade without affecting prices.