
Forex Scandal Drives Shift to Algo Trading - jackgavigan
http://www.wsj.com/articles/forex-scandal-drives-shift-to-algo-trading-1443444666
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lordnacho
I've written FX trading algos, and I don't think it's so much to do with the
fixing scandal.

For a long time now, FX has been a low margin business. It's just a guy on the
end of a phone. Now they can't even use their one advantage, which is
knowledge of flow, because of regulations about prop risk. So that guy on the
phone, he's being replaced by a robot. At the end of the day, what does a
market maker do? He provides prices and tries to keep risk steady. You can
easily (*tm) write a program that does that.

The fixing thing, sure, it means something. It means you lose another income
source, because now everyone will be afraid of getting caught. And rightly so.

But the writing was on the wall for the FX traders for a long time. Pretty
much every trade under a few million bucks is done by a machine. To justify a
phone call you're looking at maybe 30MM USD minimum. If you want to hide your
trading, you can probably break up your big trade with an algo. It's also
likely that if you have a big order, the guy on the desk is just hitting an
algo as well.

Another benefit of automation is you get a load of data about how things are
going. The banks will phone you and complain if they are losing money on your
flow. They have stats about how profitable all the clients are. And they know
if you are gaming their hedging algo.

I really doubt the figure that only 15% of trades were done by algo a year
ago. Maybe a few jumbo orders skew it, but by ticket numbers I would think
over 80% of trades are on some sort of automation.

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blazespin
I think you have to weight by trade size. If you didn't, I'd say 99.999% of
all trades are algo.

~~~
lordnacho
Yes, but even by trade size, the 15% figure is suspect. Perhaps central bank
intervention is done by mega-trade on phone. But even your huge hedge fund is
going to be able to execute their B+ trade on an algo.

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relaxatorium
Is there any good information out there on what's happened recently with the
garbage end of the Forex market?

I feel like I noticed the existence of this sector of finance primarily a few
years ago because my spam folder stopped being about "v1agra" and Nigerian
Prince scams and suddenly 90% the email scams there were about Pips and Forex
algorithms.

~~~
InternetPerson0
Not really sure what you mean. But as far as trading forex, it's relatively
cheap and easy (as these things go as regulation in most jurisdictions is
either lax, or non-existent) to set up shop and quite lucrative. The majority
don't actually settle trades, they just match their book and trade the rest
naked. Because, let's face it, it's pretty much guaranteed that almost all
retail trades will blow out their accounts. I wouldn't let my money anywhere
near those sleazy bucketshops.

~~~
relaxatorium
To be slightly clearer, what I mean is that in, say, the mid to late 2000s,
most of the spam email I saw was inducements to buy fake or generic or
otherwise illegal prescription drugs.

Nowadays, by volume most of the spam I see seems to be trying to get people to
sign up for trading "secrets" or algorithms or free pips, largely focused on
Forex markets.

I wonder what changed in the world of weird spam scams to make the content
shift in that way.

~~~
InternetPerson0
I'd have to guess that it's a more profitable market. I'd assume far more
people are likely to be persuaded to try their hand trading since they can
make a million dollars in only a couple weeks with little risk and only $1000
down! A lot of shops have introducing broker or similar programs where you
sign-up clients for them and get a cut of the spread for every trade or
commission or similar. Has the benefit of not being illegal, and, free money!

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azm1
What value do you produce for people when trading forex via algorithms? Honest
question.

~~~
patio11
Some people have yen but want to buy things, like a tanker full of oil, priced
in dollars. There once existed a specialized profession of very expensive
middlemen who would facilitate this transaction. The transactional costs would
have paid for a nice house. Computers can do it for a tenth the price, saving
money for folks in the non-finance economy when they're doing things that the
non-finance economy very urgently wants them to do.

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ryporter
I worked for 5 years as a software engineer at a forex hedge fund,
contributing to the development of their algorithmic trading system. This
shift started long before the forex scandal broke. Many different financial
markets are becoming increasingly automated, and banks are developing their
own trading algorithms in order to keep up.

~~~
topbanana
That's buy-side, a different kettle of fish.

~~~
ryporter
We were indeed on the buy-side, but we traded with the banks on the sell-side,
which we observed becoming increasingly automated.

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joosters
Here's a great explanation of the forex market development and rigging:

[https://medium.com/bull-market/oranges-and-lemons-the-fx-
sca...](https://medium.com/bull-market/oranges-and-lemons-the-fx-scandal-in-
perspective-cd3456089ce4)

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groktor
unfortunately this is behind a paywall... :(

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noja
Sssh!! You're not allowed to mention the paywall.

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dang
It isn't a question of "not allowed", but of tedium. More than half the
comments in this thread are paywall complaining or responses thereto.
Meanwhile the actual article isn't hard to read, as many users have pointed
out. This is just the kind of noise that we added that guideline to dampen. HN
would be worse off without these articles, and better off without these
comments.

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imaginenore
Full text: [https://archive.is/lY4Yz](https://archive.is/lY4Yz)

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daimyoyo
> To Read the Full Story, Subscribe or Sign In

lol no thank you

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codedokode
Why post links that are behind a paywall? This needs to be downvoted.

It may be a great article but why post it here if nobody cannot read it?

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kasey_junk
Anyone who is a subscriber can read it. Is there some rule that HN posts must
be available to freeloaders?

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icebraining
Yes.

 _Are paywalls ok?_

 _It 's ok to post stories from sites with paywalls that have workarounds._

[https://news.ycombinator.com/newsfaq.html](https://news.ycombinator.com/newsfaq.html)

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kartan
A [paywall] warning will have been polite. :(

~~~
grayclhn
All articles at wsj.com are behind a paywall. As other comments have pointed
out, you can get past the paywall through google.

