As the FX market becomes more automated and continues trading faster, the industry needs to implement better controls to prevent disruptive behaviour, says Greg Wood, SVP, global industry operations and technology at FIA.
Drawing on his experience working in both the FX and futures markets, Wood observes that both are fundamentally driven by technology now and are highly automated.
He adds that “with any type of automation you’re going to have increases in speed and your controls have to maintain pace with the other increases in technology, so as the market gets faster, you need to have appropriate controls.”
One such control that Wood suggests could be utilized is to look at repeated messages and have a throttle in place that can kick in if something is clearly having an incorrect impact on the market. He also notes that trading venues have a responsibility to put controls in place in order to maintain the integrity of the market place.
Wood says that putting synthetic limits on the use of market orders could help prevent future flash crashes, pointing out that some futures exchanges have these in place and that “at least it leaves you something that’s going to rest in the market once it’s exhausted all liquidity rather than just sitting there sucking out liquidity as it comes back into the market”.
Circuit breakers were another example cited by Wood of controls that could help prevent flash crashes and limit the impact of disruptive trading in a fast moving, highly automated trading environment.
“Now you can argue what’s a good circuit breaker for a particular currency, because currencies will move, but you can put in circuit breakers that will limit a rapid movement, maybe pause. Yes, ok price discovery continues and if this is a true re-valuation of a particular market then, yes, that goes in. But there maybe be a point where you get to the point where this has moved too much, for the sake of sanity and integrity of the market this has to stop,” he says.
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