This page has been archived and commenting is disabled.
Behind The Scenes In FX Trading: What Is Really Going On
Earlier this month we got confirmation of something we postulated back in April: that the primary source of revenue for Virtu (which, as a reminder, has had only one losing trading day in six years) is no longer equities but FX. Here’s what we said:
Today, Virtu released its first public financials since going public, and our speculation has been proven correct: FX is now the largest revenue generator for VIRT, amounting to 28.4% of revenues in the quarter ended March 31, at $42.2 million, well above the $29.1 million generated from trading America Equities and the $34.7 million from global commodities.
In fact, as the chart below shows, on an LTM basis, FX is now not only the biggest revenue item for the world's dominant HFT firm at $131.1 million, but is also the fastest growing source of profit, rising 103% on a year over year basis!
Why the shift? Simple:
...with retail now forever done with rigged, manipulated capital markets (at least they get a free drink losing money in a casino) and even banks scrambling to find any volume be it in flow or prop, there is just one remaining "whale" source of dumb money to be front run: central banks. And as everyone knows, central banks trade mostly in the FX arena.
What are the implications? Again, simple:
...with Virtu, whose business model is geared to frontrunning whale orders in any market, irrelevant of their nature, now solely focused on clipping pennies ahead of central bank FX orders, it means that there is no longer any space for retail investors in yet one more market, where market wide stop hunts, squeezes and momentum ignition have become the norm, as the only "traders" left are a few central banks and every single algo that hasn't cannibalized itself yet.
And so, with the machines having firmly entrenched themselves in FX, and with the world’s central banks engaged in an epic global currency war in an increasingly futile and self-defeating attempt to create demand by printing fiat money, we can expect a wild ride in currency markets going forward or, as we put it more than a year ago, “the next time you feel like the USDJPY is trading as if it is in need of a software update, you will be right.”
Sure enough, we’re now seeing the same dearth of liquidity in FX that we would expect from a market that’s been cornered by central banks and manipulating algos, as liquidity dries up, bid-asks blow out, and volatility spikes. Here’s JP Morgan with more:
What about FX market liquidity? We can also construct a HH ratio for FX markets using FX futures. With the caveat that much of the volume in FX markets goes through OTC spot and forward markets, where volumes and turnover are less transparent, we construct a HH ratio for DM markets as a DXY-weighted ratio of FX futures for the euro, yen, sterling, Canadian dollar, Swiss franc and Swedish krona vs. US dollar, shown in Figure 10.
By "HH", JP Morgan means a Hui and Heubel Liquidity ratio which, put simply, tries to measure how much trading is going on behind observable price moves. Unsurprisingly given everything we've said above, liquidity as measured by JPM's FX HH ratio is declining fast:

And as for bid-asks... you guessed it:
This ratio has been declining from the second half of last year, driven mainly by EURUSD and GBPUSD futures which have the highest weights, and also to a lesser extent SEK which has seen more recent declines in the HH liquidity ratio. Do other measures of FX liquidity confirm this trend? We look at the 3-month moving average of the bid-ask spread for these currency crosses, also weighted by their weights in the DXY index (Figure 11). Indeed, the rise in the average bidask spreads appear to coincide with the decline in the HH ratio for DM FX in Figure 11. In addition, FX volatility, proxied in Figure 11 by the JPM VXY index of 3-month implied volatility on basket of G7 currencies, rose over the same period.

Rising volatility, wider bid-asks, and no liquidity.
Sounds a lot like the JGB, UST, and Bund markets to us and indeed every other 'market', which is why you can expect things like last October's algo-driven, Fed-assisted Treasury flash crash to become par for the course in FX markets as well, with harrowing USD, EUR, JPY, [fill in the blank] ramps and flash crashs becoming the norm and leaving panicked central bankers desperately trying to figure out what happened after the fact.
And remember, the is all perfectly legal which is why when enough gut-wrenching examples of what happens when the markets are completely broken have unfolded for all to see, some inept regulatory agency will trot out a carbon-based fall guy or, as we put it three weeks ago, "oh, and when the USD flash crashes again, expect some trader in Thailand operating out of his parents' basement to once again be scapegoated for disrupting yet another market that now has zero liquidity thanks to HFTs."
- 16809 reads
- Printer-friendly version
- Send to friend
- advertisements -



God be with the days when the likes of Stolper and MCNeill Curry used to just guess.
pure terror
Brilliant.
(say, by liquidity are they referring to hydraulic oil and greases yet?)
( if so the proper term would be viscosity )
--Skynet
The new term is visquidity because I just made it up and it's snappy.
Copyright that and sell the name to a motor oil company or sex lube manufacturer.
(Ralph - I think I bought one of your used cars! The car sucked, but the free toaster was all good.)
My analysis is getting fulfilled one point at a time.
After saying that liquidity in stocks and bonds will die, world will walk out of the stocks and bonds, when QE3 started, now that is a reality
My analysis tells me that one last frontier is left for the world to walk out on due to QE and USA voluntary military disengagement:
Trading of USD
This is the last frontier. World will walk out of it also, unless Dollars are drained, insolvent banks are wiped out and US Military starts doing its job again as world police
It's pretty tough to use VOL in F/X. Most F/X platforms don't measure index VOL like an equity index. The $usd is going to flash crash again. It won't be a Friday "after hours" either.
I think Algos are gaming the options side of F/X. The market is so liquid compared to equities, that the cost of spoofing orders and controlling flow in the spot market would be redundant.
It's funny, 1-2 years ago everyone thought low interest rates would force longer drawn out trends in F/X for yield protection.(pension funds/401-k's, insurance companies) It looks like lower yields are causing the exact opposite effect now.
The Fed. is so boxed in... I think they may actually raise rates just to send a message.
Thanks Yen. Great insight from someone who knows. Interesting what you said about the Fed being boxed in and sending a message.
As much as I hate to say it, and I'll owe Doc a sandwich... I think Mr.Yellen might surprise in June just to take the froth off the CASINO.
The Fed balance sheet has actually been growing... Some astute poster mentioned this yesterday, and was 100.00% correct.
Ben Yellen said he/she would not shrink the Fed's balance sheet until at least the end of the decade, he/she's just rolling stuff as it matures, something like $20B per month...so QE never ended. He/she may try 25 b.p. for symbolism but I think that'll be it, if they don't have stocks as the transmission channel for confetti, oops I mean money, then what's next, helicopters? (Hint: yep)
I too think there is a damned good chance the Fed will announce a hike in June. They have to be aware that things need to be cooled off before things get TOTALLY out of hand. And they know they are close. A Fed Chair rarely indicates that stocks are nearing bubble levels. Yellen did last week. And no one cared. That caught my attention, that no one cared.
So, QE(n) feeds fresh money to the machines and thus to their owners: a one way flow. Hm, are the printers and machines owned by the same people?!
Fresh digital money dilutes common currency, no? Then does not the QE-Maker/Machine-Owner incest simply rob all the rest of us of our material worth, little by little?
What happens when the machines have sucked all their inkwells dry? What, then, will the owners command their machines to do? Spend the loot to buy up the world? That is,
Oh, and THEN what will they do, fly away from the poisoned wreckage to another place, in magical alienTech carpetSaucers? Well? They already know about that "error" is in the equations of Mr. General R!
[Spoiler: gravity does not equal momentum under high electrical potential.
Google it and learn what is forbidden today to "our" scientific minds under severe penalty.]
The big players already own everything worth owning. The increase in craziness in just about every category you can think of seems all part of an end game concluding some kind of struggle between these same players trying to increase their share of the pie. This struggle probably spans decades by now. Gotta end sometime, just try to be in front of a chair when the music's over.
perhaps it's only a party game to them
If a guy with a few million can be arrested for manipulating the markets, the problem is not with the manipulation, it's with the markets...
I definitely see much less volume in the futures than I used to.... maybe day to day the turn over is similar to 10 years ago, but now there are periods with zero activitiy, barely a single trade goes through, the market sits, the bid ask is wide and nothing happens. These periods often produce peculiar looking patterns that look like something from a scientific or engineering graph, clearly algos trading against themselves....
I also see crazy movements that make no sense, and if you have the capital (and balls) to sit through it, you just ride it out until it comes back, because it's algo driven nonsense.
I still trade FX, and I do just fine. No stops and small bites at 50x leverage is a great gig.
I agree with Yen that June is a strong possibility, better than 50% for .25
I'm not trading on it, but if it happens? Watch for the opportunity to fade, cause the next .25 may then be a l-o-n-g way off.
No stops. F/X is a full time job. There's plenty of money to make trading f/x.
Thanks for the kind comment...
EA's and such BS are retarded. Algo's stop hunt, when you're not around. I'm already working on some ideas to use that "phantom" algos into being "locked into" their trades.
Most algos don't have the bankroll, to cover their losses. They spoof the front end, and pull their bids just before the "que" hits their orders. We're going to stuff them, and force their buy~sell orders.
Bitchez~
FX is not a hobby. I'm not as sophisticated as you Yen, but I live it and do pretty well basically scalping. Definitely believe that if one trades like me...Must be fully immersed, constant awareness and an intuition disiplined by extreme familiarity coupled with a price action fetish...
LOL.
It works.
Please do let us know when this fuck the Algos kicks in. I watch SPY daily and the Algo garbage is sickening and so freaking Obvious!!! They do both sides, but for every Down algo spoofing, there are 20 - 50 on the Up side ramping up the price and then pulling as some sucker pays 5 cents, 10 cents or more cause of the spoofing
Do em good and let them rot on their own doing - fuckerz.
Thanks and best of luck.
what broker are you using?
ive noticed that oandas prices are more or less bullshit..are you using a real broker or an arcade company like oanda/fxcm?
Nice posts.
The last two years of forex trading have been fantastic for me so it's funny to read this article. I'm using no automation and I find the flow has become more predictable, perhaps thanks to HFT. I don't particularly care what the cause is, only that it's improved my profitability.
I agree Yen, rates are going up soon.
Weekly on CAM and guide to oil stocks generally http://market-guru.co.uk/a-technical-look-at-cam/
The combo of this article and the great comments reminds me of why I still come to ZH and put up with so many ads my browser stops working...bravo everyone!
My browser also... I usually check out all my other sites first, because i know when i get to ZH, my browser will lock up and i have to reboot. Doesn't happen for any other sites.
GO FIGURE!
Mozzila and ad block plus, I haven't seen a browser crash or dancing polish Japanese Viagra chimp in ages..
somebody needs to write a NSA block program , not that we could trust it.
Use Adblocker.. No more pop ups.