How Computer Forex Traders Obliterated Humans

When I become a wheezy old grandpa reminiscing about the "good ol' days" as my captive audience of grandchildren pays scant attention, I will discuss how people [remember those?] actually did market trading back in the day. Recent international investigations into alleged collusion in foreign currency trading are the spur here, with the parent banks of FX biggies Deutsche Bank, Citigroup, Barclays and UBS AG feeling the heat. Since they have already been through countless investigations and billions of fines over subprime mortgages, tax avoidance, Libor scandals, etc., major banks have likely had enough of forex trading as well.

To ensure human frailties do not get the best of traders and the temptation to collude, what better way is there than to replace them with computers via program trading? Apparently, that's they way things are headed for forex, too:

A widening probe of the foreign-exchange market is roiling an industry already under pressure to reduce costs as computer platforms displace human traders.

Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81 percent of spot trading -- the buying and selling of currency for immediate delivery -- will be electronic by 2018, Aite said.

“Foreign-exchange traders are much like stock floor traders: a rapidly dying breed,” said Charles Geisst, author of “Wall Street: A History” and a finance professor at Manhattan College in Riverdale, New York. “Once the banks realize they are costing them money, the positions will dwindle quickly.” 

The irony is that while daily forex trading volumes have gone through the roof--the article quotes a staggering $5.3 trillion daily--margins have plummeted. Hence, thin margins have likely encouraged even greater volumes to make up:

“The margins are very, very skinny in foreign exchange because it’s easy to move onto a trading platform,” said Wheeler, who tracks European lenders. “The move by banks into electronic trading in other areas has cost a large number of jobs, and we’ve seen revenue come off sharply. The foreign-exchange probe won’t help this.”

The push toward electronic trading probably will lower costs for customers and boost transparency of pricing, according to Cormac Leech, an analyst at Liberum Capital Ltd. in London. It may also squeeze margins for banks, he said.

One outcome is clear--human traders will become endangered as more forex trading becomes standardized. Computers have to be able to communicate with each other without human intervention, no? OTOH, whether forex trading volume will take another leap is an open question. To make up for even thinner margins from program trading, will trade volumes take an even greater leap forward? Or, will banks simply reduce the size of their FX trading desks?

The sensible option is the latter which involves less speculating in forex and refocusing its role in facilitating real international trade. But then again, there is little to suggest that modern-day bankers do "rational."