"The Liquidity Just Dries Up In A Stressed Market" - How HFT Killed FX Trading

Tyler Durden's picture

Two years ago, when looking at the first available public data out of HFT frontrunning powerhouse Virtu, we observed the surge in net income from FX at the expense of all other traditional product categories, and reported what we thought was "The One Financial Product Now Targeted By The HFT Swarm" - currencies and FX in particular.

We made the following forecast:

"for those trading FX, our condolences: because the typical bizarro, idiot moves that previously were reserved for stocks are now sure to take over the final bastion of capital markets. In other words, the next time you feel like the USDJPY is trading as if it is in need of a software update, you will be right."

We were also right, and two years later not only have thousands of FX traders lost their jobs (in no small part due to massive criminal collusion which has sent hundreds of riggers packing) to algos, but Bloomberg reports that in true HFT fashion which provides copious liquidity when it is not needed, and pulls all bids and offers the moment there is a violent move in the underlying, leading to an instant evaporation of all liquidity in what is now known as an "HFT stop" moment, "the specter of shrinking liquidity gripping fixed-income desks globally is creeping its way into the world’s biggest, most liquid financial market." FX.

Bloomberg adds that "amid conversations about central bank policy and algorithmic trading, it was concerns about diminishing liquidity -- or the prospects of it drying up entirely during times of market stress -- that dominated discussions this week at the TradeTech FX conference in Miami."


The so-called experts, who apparently could not see this coming from two years away, were stumped:

Pension funds, hedge funds and other asset managers were seeking answers after a string of so-called flash crashes in recent months sent some of the world’s most-traded currencies plunging. New Zealand’s dollar, the Norwegian krone and South Africa’s rand have all become victims to the phenomenon, as regulation pushes banks to reduce their size and cut down on market making. The ability to exchange currencies rapidly and cheaply is vital to everyone from importers and exporters to central banks seeking to ensure the smooth functioning of global markets.

Among the experts was Collin Crownover, head of currency management at State Street Global Advisors Inc., which oversees about $2.4 trillion,  who during a panel presentation said that "we are concerned. During volatile periods, market participants are backing away until conditions settle down, making it harder to complete large orders."

“A lot of the electronification of the market, which by and large is a good thing, has led to kill switches on a lot of that algorithmic-provided liquidity,” Crownover said. “The liquidity just dries up in a stressed market.”

Yes, it's called "high frequency trading" - get used to it.

The biggest irony is that even as investors lament disappearing liquidity, they are doing everything to make sure there is even less of it in the future: "Institutional currency investors are adopting more algorithmic trading that uses mathematical models to make transaction decisions, conference participants said."

While algorithmic trading in foreign exchange is growing, it remains limited compared with other markets such as equities, according to Kevin McPartland, head of research for market structure and technology at Greenwich Associates.


That presents opportunities as firms that create algorithmic systems seek to target institutional investors, according to Alfred Eskandar, chief executive officer of Portware LLC, which offers systems to manage and execute trades. Investment firms have tripled algorithmic trading in the past year, and “we actually think that’s going to triple again this year because there’s a couple of very large asset managers who now want to use algos,” Eskandar said during a panel.

In other words, so if currency traders though FX flash crashes are bad now, just wait until virtually all trading is done by algos whose only directive is to frontrun major flow orders, and just in case it is still unclear - the only time HFTs provide liquidity is when they know there is a solid order behind them willing to take actual market marking risk; if the HFT is itself the market maker in a thin and illiquid market, it will simply do what HFT have done since when Reg NMS first made them legal: quietly pull all bids and offers.

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Stuck on Zero's picture

Crack up boom. There goes another market.

JRobby's picture

The "rainy day FX savings funds" are maxed and looking for more. As much as they can possibly get their hands on.

Bay of Pigs's picture

Trader: "What the fuck just happened? My screen is blank".

StychoKiller's picture

"Monsters!  Monsters from the I.T.!" -- with apologies to "Forbidden Planet"

"Failsafe" is working for someone, just not everyone that needs a functioning Market.

Bangin7GramRocks's picture

Tough Titty paper shuffler!

Ghordius's picture

of course HTF dries up liquidity

imagine a pool. it's wideness measured in... time. now stretch this dimension up to the nanosecond and yes, watch how it becomes less deep, i.e. less liquid

the opposite of the whole is when you stop trading 24 hours a day, like some commodities were traded only one hour a day, or one in the morning and one in the afternoon, not that long ago

even more liquid is of course an auction. the so called primary bond markets are still handled in form of auction. maximum liquidity

seriously, that ought to belong to the 101 of markets: stretch the time you can trade, and the available liquidity becomes... thinner. just saying  /bob

buzzsaw99's picture

they need "reasonable clearing prices" bitchez!

Tinky's picture

HFT is "overall good for the market"?

Yeah, right.

Moonrajah's picture

Do algos dream of electric sheeple?

OverTheHedge's picture

I gave you a rare up vote for that, but it's not enough. Very nicely done, sir.

LawsofPhysics's picture

Makes sense as all currencies that are being traded are fiat currencies and all fiat is dying...

saveUSsavers's picture

We're supposed to feel sorry for this m=phucker COCKROACH?

TrustbutVerify's picture

So, the bigger implication is that even now the daily liquidity is inflated by the HFT vapor trades.  

Recently, I have been under the impression currencies were the upcoming place to be.  And volume is falling?

RaceToTheBottom's picture

But wait, HFT was supposed to increase liquidity, not decrease it.  

Wall Street is the largest terrorist agency in the world.

medium giraffe's picture

Fx volatility has been dying for the past few years, you can see that in the daily ranges now as compared to six or so years ago.  Some of us are still hanging in there though, and I'd still rather be trading fx than stawks.

carneades_jazz_hands's picture

By definition HFT's are a liquidity taker.  It can't be otherwise.  The unfortunate side effect of their quasi legalized front running is that the "powers that be" by allowing it, have also increased transaction costs.  You may think your commission prices are low, but you're also paying an extra, extra tic in bid-offer spread.  Higher prices drive away end users. 

I'd really like to know who the owners, the real owners of these HFT's are.  I wonder how many have Exchange leaders and regulators as investors. 

geeves's picture

This is actually not true.  There are HFT market makers who are liquidity providers, and they are a significant portion of HFT.  There is indeed bad HFT out there, particularly those who spoof prices they don't intend to trade which is a legitimate problem, but it's far from the case that all HFT is bad.

geeves's picture

Again I tend to disagree with ZH on the issue of HFT (you can find one of my previous comments on this on a past article), and most people here will likely disagree with me which is fine.  ZH seems unable to distinguish between types of HFT, particularly between true market markers, momentum aggressors, and spoofers.  Out of these classes, only market makers are likely to be involved in filling large orders.  Therefore ZH seems to be implying here that market makers should keep all their orders in the market no matter what conditions dictate so that they can get filled at losses for the benefit of the mega banks who in reality are the source of all these problems, not HFT.  Yes let's ban all HFT including legitimate market making so that our central banking overlords can cartelize yet another piece of market activity and make sure they can get their artficially large too-big-too-fail mega orders filled at any counterparty's expense.

SillySalesmanQuestion's picture

Perhaps if my name was Chip Silicon, I was not a carbon base unit and I could forgive your constant referencing of "market making," then I could possibly agree somewhat with your position...I'm not and I can't.

geeves's picture

Market making has nothing to do with computer science or chips in any way.  It's a classic term in trading that pre-dates computers.  If you'd like to learn about how a market works irrespective of computers, check out one of my previous comment threads where I describe in detail exactly what market making is:


It's on the second page of comments, comment 7139531 in case the link doesn't take you directly to it.

SillySalesmanQuestion's picture

Thank you your response to my sarcasm laden statement and explaining with great clarity, what a market maker truly is. My perception over the years was more along the FED driven liquidity and intervention, the difference which you eloquently explained in your link. Thanks again!

geeves's picture

No problem at all.  I appreciate you taking the time to read it through and hear me out!

Multivariate Man's picture

A rationalization can be constructed for any trading or economic strategy and those who benefit from unfair extractive strategies will always view things in such a way as to claim benefits for others in what they do.  Michael Lewis, no fool, and Nanex, among others have clearly shown that HFT is extractive.  It subtracts not adds value.

geeves's picture

If you take the time to simply read what I linked to in my comment above just like SillySalesmanQuestion did you'll actually be able to understand the differences for yourself rather than relying on a summary understanding derived from other people.  Michael Lewis actually openly admits that he doesn't understand the differences between different types of HFT and lumps them altogether.  He views all HFT as the spoofing variety; this is completely incorrect.  Regarding Nanex, they too focus in on spoofing, but if you find an article in which they specifically attack market making by all means please post it here.   I highly encourage you to apply the trivium and learn about HFT market making for yourself by checking out my previous post linked to above.

Kirk2NCC1701's picture


Until then, it's just the porn gyrations, fluffing, froth and PPV shows in the Fiat Casino.  And I don't care about your fiat decrees and debt chits.  

p.s. Fuck you, Wall St.

Conax's picture

When someone invents a way to hang an algo, the world will beat a path to his door.