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Retail Traders Apply Algorithms to FX

"We're seeing retail traders now come in building their own models and who are involved in high-frequency trading," says Thomas Plaut, CEO of online foreign exchange broker FX Solutions.

As online brokers make foreign exchange trading more accessible to retail traders, algorithmic trading is spreading beyond institutions to the savvy individual. "We're seeing retail traders now come in building their own models and who are involved in high-frequency trading," says Thomas Plaut, CEO of FX Solutions, an Internet-based foreign exchange broker in Saddle River, New Jersey, that provides a global trading system specializing in the top 20 high volume currency pairs.Whereas in the past, foreign exchange was a clubby world dominated by banks, now the retail trader has access to information via the Internet and can develop their own trading tools. "There is this misnomer in the market that retail traders are not good traders - that there is not smart flow. It's the exact opposite," says Plaut whose firm specializes in delivering non-latent prices to retail traders. "The retail trader, because of their access to information, is savvy," insists Plaut. FX Solutions white labels its systems to institutions that include aggregators of retail clients, small hedge funds and CTAs.

Increasingly, retail traders are actively participating in spot FX, the world's most liquid market where the daily turnover is $3.2 trillion, according to the latest Bank for International Settlements report. In addition, investment banks are delivering their own liquidity into their own portals or into aggregators of liquidity.

But, the more savvy retail traders go to brokers that specialize in FX, says Plaut. And several other brokers are offering FX trading to sophisticated individuals, including Gain Capital, FXCM and Interbank FX.

Last week, Citibank announced a partnership with Saxo Bank, the Copenhagen-based online bank, to launch CitiFX Pro, an online foreign exchange trading platform that will cater to sophisticated individuals and smaller institutional traders. The platform is being customized for Citi and will go into the market in the next few weeks or possibly at the beginning of 2008, according to Lars Christiansen, co-CEO and co-founder of Saxo Bank in an interview. The product includes streaming prices and will offer options functionality, though it will not offer research distribution, he says. "It's quite a sophisticated trading and technical analysis tool," says Christiansen.

According to Todd Crosland, CEO of Interbank FX, a retail foreign exchange broker in Salt Lake City, Utah, the retail spot market is growing 50 percent a year and is projected to grow at that rate for the next six to eight years. His firm has grown 100 percent a year for the past five years and reaches traders in 135 countries including those in Moscow and Beijing.

As part of its trading platform that includes free real-time news, technical analysis tools and educational webinars, Interbank FX offers an automated trading feature allowing customers to run their own algorithms. Some retail traders are executing 300-to-400 trades a day via an algorithm, where the computer looks at all the currency pairs, says Crosland. The trader downloads a program called Expert Advisor from Interbank FX's platform onto his or her own computer. "After you write your strategy, you can back test it," says Crosland, who notes that tick data is saved for them. "It's man versus machine," says Crosland. Interbank FX awards cash prizes of $5,000 a piece to the most profitable traders. Crosland estimates that 15-to-20 percent of the retail clients use automated trading, while 50 percent of the CTAs use automated trading.

Meanwhile, Plaut says his customers are savvy traders who are experienced in trading other asset classes. They are global - FX Solutions has customers in 120 countries and they tend to focus on three or four currency pairs and are active 24-hours a day.

"You have retail traders who have significant programming skills and are highly educated and motivated to do well while access to the market has increased dramatically." In addition, "transaction costs have decreased so the playing field has leveled considerably," says Plaut.

However, all this automation means that FX markets are highly efficient. Unlike in the past, when the wholesale (interbank) FX market was dominated by the human trader who was responsible for making markets, now it's all done systematically, explains Plaut. "The computer is running all the algorithms which makes all of our pricing instantaneous to clients," says Plaut.

With quantitative hedge funds and market makers like FX Solutions constantly seeking inefficiencies, correlations and arbitrage opportunities, the FX markets have become more efficient and the algorithms need to be revamped more frequently, says Plaut. "Markets are highly observed. What used to work for a year, now works for 90 days," says Plaut. This in turn is creating demand for more algorithms and more quants with new ideas, says Plaut."We're seeing retail traders now come in building their own models and who are involved in high-frequency trading," says Thomas Plaut, CEO of online foreign exchange broker FX Solutions. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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