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Avoiding arbitrage – the importance of web performance in forex

Contributed by:Alex Nam, Managing Director EMEA, CDNetworks

Speculating on foreign exchange (FX) is no longer the preserve of billionaires and fund managers. FX is the largest market in the world, and thanks to the immediate effects of currency fluctuations on the price of imports and the cost of holiday souvenirs, it’s more understandable than many other types of trading. There is also less of a barrier to entry – many types of investment or trade require a third party to be involved to actually make the transaction, or need a minimum amount of capital to be invested.

Alex Nam
Alex Nam

Forex, on the other hand, is as simple as an online auction or ecommerce purchase, and is available 24/7. Buying shares in a listed company means waiting until the exchange is open, whereas currency can be bought around the clock. It’s the biggest market in the world with over $5 trillion traded every day[i]. While 95%+ of this is currency traded by corporations and banks, the retail market, while less than 5%, is still huge.

This combination of demand and ease has led to the creation of online portals to buy and sell currency. These portals are aimed at those looking to dabble in forex, as well as those more serious about following trends and making predictions – just as online gambling has opened up betting to a wider audience than those willing to brave high street betting stores.

But these online portals run a particular risk, akin to a gambling site taking bets on a race that has already finished. Arbitrage, the practice of buying currency from one site at a particular price and then selling it instantly at a better price elsewhere, can mean big losses. With zero risk for whoever is performing these trades, and the ability to trade a lot of money at once, the potential losses can be staggering.

A delay in updating exchange rates could be ruinous if a customer takes advantage of this difference in exchange rates of competing platforms to make a profit. Thanks to the automated nature of these trades, milliseconds matter. Software is used to scan for opportunities to buy and sell and make trades automatically. A delay of a just a few milliseconds could be enough for a trader to make a huge profit – and for a forex broker to make a huge loss.

Businesses being able to offer up-to-date, accurate prices on their website is good, but for forex it’s actually vital for the survival of the business. Exchange rates change so quickly that every millisecond counts. Unfortunately, if a website is not hosted close to the user, then out-of-date data such as exchange rates can be more than just a few milliseconds out, but a few seconds.

Local delivery of content, either by hosting at a local datacentre or by caching by a content delivery network, is most often the solution to long loading times. Simply by cutting down the distance from the user to the content, the time to load a page is drastically reduced. Content can be served in milliseconds rather than seconds.

This caching of content will fix help fix issues for a website that only relies on static content, but it doesn’t help with a forex pricing engine. The constantly changing nature of these prices means that local caching is useless. Were data to be cached, the information would be instantly useless, a historical record rather than the up-to-the-second accuracy forex demands. Another complication is the fact that pricing information is often non-browser based traffic.

The answer to this again lies with content delivery networks, but it needs to be one with the capability to accelerate the engine so that the forex website displays up-to-date-pricing. Accelerating website content means accelerating the “application layer” – but speeding up a pricing engine means accelerating the “network layer”. The CDN should also, of course, accelerate static content by caching to offer an overall pleasant and fast customer experience – a fast pricing engine on a slow website is no good.

The retail forex market is likely to become more competitive in the future, and forex providers will likely feel the impact of regulation such as PSD2. As such, it’s vital that they remain competitive and protect their business from those who would exploit it, by being as real-time as possible. And, of course, have a fast, responsive website that does not frustrate users won’t hurt either!

*Previously published in Issue 8