Can You Lose Money Due to High Frequency Forex Trading?

High speed electronic trading has come to the Forex markets. Can you lose money due to high frequency Forex trading? Bloomberg writes about high frequency traders in the currency markets.

Algorithmic traders have more than tripled foreign-exchange volumes over the last three years, seizing opportunities as Wall Street banks withdraw from currency dealing, according to Aite Group, a consultant in Boston. The new group of market makers is trading almost $200 billion a day. While that may seem small in the context of the sprawling global currency market, consider this for perspective: Stock trading on all U.S. exchanges totals about $270 billion a day.

Critics say that high frequency traders will exit the market at critical times and only stick around to skim profits when available. High frequency traders counter that they provide need liquidity as many investment banks have gotten out of the currency trading business. Is high speed algorithmic trading profitable for the traders and is it a detriment for others?

The Impact of High Frequency Trading on Forex Markets

Trade Tech Fx writes about the impact of high frequency trading in Forex.

Many HFT programs are installed in specialized data centres located near an exchange. Since the speed of execution is limited by the speed of light, many programmers and investors try to minimize the amount of time it takes for an order to be executed. This is possible by minimizing the amount of time it takes data to travel between a data farm and an exchange.

Most HFT programs are designed to profit from very small price differences in a currency. In many cases, a program will make a profit of only a few cents per trade. However, millions of these types of trades every day can yield a significant profit.

There are several significant risks when running a HFT program. While many of the world’s best programmers work in HFT, it’s possible for there to be many potential problems. For example, trade execution errors and delays can cause price instability in an exchange rate.

For example, the stock market experienced a flash crash in 2010. During this flash crash, automated HFT trading tools sold large quantities of stock. In seconds, many of the world’s top stocks dropped significantly in value. This caused large financial losses around the globe.

The concern is that very fast but not always very smart trading programs can skim profits in a normal market but raise havoc and cause flash crashes in micro seconds. If you are in the way during this micro second your account could be sucked dry before you can react.

What Can You Do?

If you are a normal Forex trader the way to beat the high frequency traders is to stay out of their game. You are never going to beat them to a trade but you can still swing trade using your knowledge of fundamentals and you can still trade Forex options so that you reserve your chance for a profit that can’t be wiped out by a flash crash.