* High-frequency trader interest in emerging markets grows
* HFT in dollar/Mexico peso, Turkey lira/yen seen
* Decline in transaction size a reasonable proxy for HFT
* Big problem for emerging market currencies is liquidity
By Gertrude Chavez-Dreyfuss
NEW YORK, June 13 AienTech is not your typical
There are no set work hours and its 11 employees, most of
whom dress casually in T-shirts, jeans and flip-flops, come and
go as they please.
Its Manhattan office looks more like a mini-sports club
than a trading floor, with a Ping-Pong table, a couple of board
games and a separate massage and sleep area.
But its laid-back appearance belies its lofty ambitions to
lead the pack in rapid-fire, computer-generated global currency
AienTech is building more sophisticated machines than its
larger high frequency competitors, and it aims to generate
about $100 billion in volume per day within a year. It also
plans to navigate the murky waters of emerging market
currencies, a sector in which many see a huge upside
Ugur Arslan, AienTech's founder and managing director, is a
33-year-old, soft-spoken Turkish engineer who likes to build
complex machines from the ground up. His new high frequency
trading fund will begin to trade the most liquid emerging
market currencies over the next few months, he said.
"As emerging markets improve both their technology and
infrastructure, the increased number of participants will
produce opportunities that will spike interest for high
frequency firms," said Arslan, whose fund will also trade other
assets such as commodities and futures.
"There is already a trend among high frequency firms to
move onto new emerging markets where competition is not that
These high-octane players, who run a bunch of super-fast
computers designed to execute trades in milliseconds, have
reportedly bumped up volumes in currencies such as the Mexican
peso, Turkish lira and South African rand.
For links to more of Reuters' multi-media package on high
frequency trading see:
To see Reuters Insiders series: HFT Transforms FX Market,
please click on the following link:
HFT: For interview with Aien founder and Managing Director Ugur
Arslan see: reut.rs/lkthCf
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The average daily volume of the U.S. dollar/Mexican peso
MXN= pair in the North American spot market, for instance,
rose about 17 percent year-on-year in October 2010, according
to the latest report by the Foreign Exchange Committee. The
monthly volume was up more than 8 percent in the same period.
Market participants said a good chunk of that volume could
be attributed to high-frequency traders, although it would be
difficult to distinguish the actual trades coming from their
systems since they are lumped together with other non-high
Liquidity in these currencies, however, remains limited,
which has prevented high frequency traders from dominating
these markets the way they have done in equities. High
frequency trading typically takes place in the deepest and most
liquid segments of a market.
DECLINING TRANSACTION SIZE
Analysts say one can only infer a high frequency trade has
taken place due to the size of the transaction, which has
declined over the years.
This is also consistent with the growing trend seen in the
settlement of these currencies. Jonathan Butterfield, director
of communications for the CLS Group in London, a global
settlement system, said there has been a drop in the average
value of trades being settled.
"A little over 80 percent of the trades at CLS are one
million dollars or less. Generally, that's a reasonable proxy
for high frequency trading," Butterfield said.
In addition, CLS has seen a surge in the settlement volume
of three of the most heavily traded emerging market currencies,
suggesting more and more of these units have become automated,
although not all are high frequency transactions.
The average daily volume for the U.S. dollar/South African
rand pair, for one, topped $30 billion in 2010, from about $20
billion the previous year, CLS data shows.
Chip Lowry, chief operating officer at multi-bank platform
Currenex in Boston, said CLS is critical to the success of high
frequency traders in emerging market currencies.
"When currencies enter CLS as a settlement mechanism, we
typically see volumes go up. If we see volumes go up because
there is less settlement risk, then prime brokers would start
loosening the lines for high frequency funds, and then we would
see a natural increase in trade," said Lowry.
Prime brokers, usually investment banks and securities
firms, typically allow clients like hedge funds and high
frequency firms to use their credit facilities to access
Another indication of high frequency trading is the
contraction in bid-ask spreads in a currency pair, which
suggests an increasing amount of trade.
Data from Thomson Reuters, an execution venue where most
emerging market currencies trade, shows that the bid-ask spread
in the dollar/Mexican peso pair has dwindled to about 25 pips
from as wide as 390 six months ago.
Another currency pair reportedly popular among high
frequency players is the Japanese yen/Turkish lira. Its bid-ask
spread has narrowed to about 15 pips, from around 135 in
December last year.
But investing in emerging market currencies remains
hampered by a lack of liquidity
"When you look at the liquidity profiles in developed
markets, you can see trades flowing throughout the day," said
Paul Aston, head of quantitative solutions at Morgan Stanley in
New York, "When you look at emerging markets, there are periods
when there is zero liquidity."
This has resulted in what analysts call a "gap" in the
market, or a sharp increase or decrease on a price chart when
there is no trading volume between the moves. In major currency
pairs, gaps are rare due to the depth of liquidity.
David Rutter, chief executive officer at ICAP Electronic
Broking in New Jersey, which owns electronic trading platform
EBS, further stressed the need for a "high-beta" market such as
futures to back up positions in emerging market currencies.
"For the real high frequency traders, it's important to
have both a spot and futures market," Rutter said.
"Take the case of the U.S. dollar/Mexican peso. It's very
popular among high frequency traders because you have the spot
market, on the one hand, and a liquid futures market, on the
other, and you can get in and out into the other," he added.
Overall though, most market observers agree increased
liquidity in emerging market currencies will come because the
interest among traders is growing.
Declining profits in trading major currency pairs are also
prompting high frequency players to seek returns in other
foreign exchange crosses.
"Their profit margins are tough to begin with because
they're doing small lots. And it's only going to get tougher,"
said Sang Lee, a partner at research firm Aite in Boston. "So
they're constantly looking for opportunities to move well
beyond the currency pairs they're trading now."
The prospect is especially bright for the Chinese renminbi,
which still trades within a band against the U.S. dollar.
The Chinese government launched spot trading in the
renminbi in Hong Kong last year, called CNH, which has sparked
some interest among high frequency traders. Currently, all CNH
trades, at least those done on EBS, are done manually.
"The goal is to make the Chinese yuan one of the most
liquid currencies in the world," said Richard Olsen, founder of
OANDA, a currency trading platform. "You cannot have the
world's largest trading partner have an illiquid currency."
(Editing by Leslie Adler)