The foreign exchange market is fighting back against high-frequency trading

Bankers announced modest progress in their fight against the high-frequency traders, which have now turnedforeign exchange marketIt has become an arena where high-tech trading systems compete with traditional "human" operations.

The world's largest trading housebrokerIcap, the UK exchange company, has taken a clear stand in favour of manual trading, saying it intends to take steps to curb "market-disrupting" operations by high-frequency traders on its popular foreign exchange trading platform, EBS.

Investment bankers have been complaining for years that high-frequency trading (HFT) - automated, scripted trading systems often owned by hedge funds that process trades at breakneck speed - has disrupted markets, drawing close scrutiny from regulators.

Many foreign exchange brokers have complained about the behaviour of some high-frequency traders, saying that instead of helping to increase market liquidity, they are also interfering with the operations of other traders. "It's really frustrating, it's getting harder and harder to trade cleanly in the market," said a foreign exchange trader at a large bank. "High-frequency trading affects our daily operations, and we just have to bite the bullet."

ICAP's planned measures will focus on operations such as "statistical arbitrage", which involves building models to track the inconsistencies in the foreign exchange market and profiting from, say, the milliseconds it takes for news from New York to reach London.

There are also high-frequency traders who can place and withdraw orders so quickly that traders who perform manual operations cannot even perceive their presence. Traders say it takes 300 milliseconds to place and withdraw orders manually, compared with less than 1 millisecond in high-frequency trading models. The ICAP move highlights how the forces that have transformed equities and derivatives trading are now affecting the foreign exchange market.

Trading patterns for equities and on-exchange derivatives have changed significantly over the past five years as new regulations in the US and Europe allow rival trading platforms to challenge existing national exchanges.

New traders and electronic market makers have sprung up, using superfast computers and high-speed telecommunications networks to arbitrage tiny spreads between competing trading platforms.

Forex trading has shown considerable resistance to this change, with an estimated 50 per cent of activity still coming from "human" dealers - in part because forex brokers play a much larger role as intermediaries than their counterparts in other markets, and because foreign exchange transactions are cleared based on different market infrastructures.

Nonetheless, the possibility of breaking into the world's largest financial marekt ($4 trillion a day in foreign exchange trading) remains attractive to large high-frequency traders such as Getco and Citadel, which have moved into market-making in the foreign exchange market in an attempt to generate higher returns in the new asset class as trading volumes in traditional assets such as, say, stocks have fallen.

In the more mature and well-regulated equity markets, traders have the freedom to choose from hundreds of different trading platforms around the world. But the foreign exchange market has only a dozen trading platforms to choose from.

That is changing. FXCM and Credit Suisse last month launched a new foreign exchange trading platform designed to bring the "speed and transparency of stock trading" to the foreign exchange market. Thomson Reuters, a rival to EBS, announced last week that it would buy FXall, another electronic trading platform, for $625 million.

At the same time, some investment banks are seeking market dominance by offering new types of services specifically designed to protect against predatory practices in high-frequency trading. Disillusioned with EBS, five investment banks recently agreed to back Tradition's traFXpure trading platform.

Some bankers have privately called for a tougher crackdown on high-frequency traders, such as curbing "flash orders" by mandating longer minimum holding times. Some high-frequency traders issue trading orders with very short valid periods. They have no intention of buying or selling at the price submitted by the order, but use it as a way to test market pricing.

However, even banks do not believe that all high-frequency traders are bad for the trading order of the market. Banks treat high-frequency traders as customers, and the vast majority of banks have their own internal electronic trading systems. Many believe that high-frequency traders provide useful liquidity in electronic transactions.

Simon Jones, head of electronic foreign exchange trading at Citigroup, said: "The human element is still very much at play in the foreign exchange market. The foreign exchange market is at a different stage of development than the stock market, that's all."