Trading & Execution

Asia-Pacific watchdogs consider range of HFT curbs

As Australia looks to tighten rules on high-frequency trading (HFT), regulators across Asia are contemplating varied responses to potential increases in HFT volumes.

In a consultation paper closing this Friday, the Australian Securities and Investments Commission (ASIC) has suggested an assortment of new measures, including pre-order filters managed by brokers to protect the market from erroneous trades and order kill switches.

But some experts – including Dr Alex Frino, professor of finance at the University of Sydney Business School and CEO of the Capital Markets Cooperative Research Centre – believe the measures will adversely impact liquidity.

“The problem with the pre-order filter is they add significant latency to the marketplace, which would make a portion of the HFT community non-viable. My concern is they could be providing good liquidity to the market, which would disappear,” Frino said.

“Within the HFT community you’ve got very heterogeneous parts of HFT activity and our studies have shown the pool of HFT trading is a net provider of liquidity in Australia. Their liquidity provision increases during significant market events,” Frino said.

Other HFT changes across Asia include the possibility of new venues introducing competition in Korea and presenting HFT firms with increasing opportunities for price arbitrage.

Last year, Korea’s Financial Services Commission (FSC) proposed legislative changes to let alternative trading systems compete with the incumbent Korea Exchange, but national elections and FSC management changes have delayed a decision.

Yet HFT firms could be discouraged from Korea due to tax rules announced by the country’s Ministry of Strategy and Finance, introducing taxes on Korea Composite Stock Price 200 Index options and futures.

Futures will be taxed at 0.001% of the transaction value, while the options tax will be set at 0.01% of the premium for the option. Both will be effective from 1 January 2016.

In Hong Kong, a two-month public consultation by market regulator the Securities and Futures Commission ends 24 September, ahead of updates to electronic trading regulation addressing a range of issues which include expected increases in HFT.

Singapore has already experienced a rise in HFT activity due to the launch of co-location services last year, where clients can place trading platforms close to the exchange’s matching engine to reduce latency, creating price arbitrage opportunities.

India has recently seen an investor uproar against HFT trading, with a 260-strong Delhi-based group – the Intermediaries and Investor Welfare Association of India – attempting to have automated trading banned across Indian venues, claiming it gives unfair advantage to those who can afford the best technology.

The petition was filed at the Delhi High Court, claiming the Securities and Exchange Board of India (SEBI) and the country’s finance ministry had neglected to protect retail investors while algo traders and co-location services made trading harder for ordinary investors. The court ruled that SEBI, the exchanges and the ministry must provide answers to the accusations before a hearing set for 29 January.

Richard Henderson +1 212 217 6916 richard.henderson@information-partners.com