Letter from Alex Lew and Leong Sze Hian
04:46 AM May 13, 2011
The authorities should examine the pros and cons of high-frequency trading
I REFER to the article “SGX woos High Frequency Traders” (May 10). There may be many disadvantages to promoting high frequency trading here. For a start, it may be a myth that high frequency trading increases market liquidity. High frequency traders often buy and sell the same security until the trade eventually reaches the hands of ordinary investors. They execute trades at sub-second speed, enabled by advance trading systems.
While they do minimise the bid ask spread in the market during ordinary times, during the market liquidation mode, algorithms generating these trades and the relevant trading volumes can suddenly disappear. High-frequency trading creates volume but not necessarily market liquidity. These volumes may disappear when liquidity is most needed during a market crash.
Secondly, funds making adjustments to their portfolios usually buy and sell in large amounts. In order to seek the best execution for investors, fund managers may usually split their orders into bite-sized orders.
The question is: What is stopping algorithms developed by high-frequency traders from seeing these orders, before otherwise normal market executions, and thus act to drive up prices and then sell them back to investors who wanted them in the first place?
Singapore is undoubtedly one of the leading financial hubs in the Asia Pacific. We would like to suggest that the authorities look further into the pros and cons of how we promote the high-frequency trading sector in Singapore, and conduct a thorough study on the actual benefits of liquidity through high-frequency trading and how investors may be disadvantaged.
We understand that Hong Kong and Australia may be developing the high-frequency business too. Hence, it may be a good opportunity for Singapore to think deeper and be a thought leader in this regard, and enhance Singapore’s development to be the leading financial hub in the Asia-Pacific.