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Jimmy Ho Kwok Hoong
29 October 2013
Since the Singapore Exchange (SGX) has invested $250 million in high- frequency trading (HFT) infrastructure, it would not be far-fetched to assume that the bourse will introduce this mechanism into our market soon.
HFT supports the use of high- speed computers and complicated algorithms. It makes transmitting of orders within nano-seconds a reality and facilitates manipulation. This is mainly used by (and gives an unfair advantage to) a small number of users - namely the institutions and market makers. Exchanges that have allowed HFT have benefited from an increase in trading volumes and trading fee revenue.
Regulators of much bigger exchanges and practitioners of HFT such as the stock exchanges in the European Union and the US have recognised the unfair advantage accorded to its users at the expense of the rest. Hence, these regulators are now contemplating restraining HFT to restore a level playing field in the markets.
Proponents here - who assert that introducing HFT is akin to embarking on a super highway meant for the likes of Ferraris and is a forward-looking move - are being myopic and prejudicial to retail players. Our smaller investors will gradually be driven out of the market.
Having a "level playing field" is not only good but an integral requirement that should not be compromised for any reason. It is therefore mind-boggling that SGX, as a regulator of the local securities industry, should be bent on introducing this mechanism here.
Perhaps the answer behind SGX's choice lies in its other role as a market operator, with its profit-oriented leanings. For herein lies the conflict of interest and a source of constant controversy. It is not good enough to assert that a segregation of functions has been incorporated within SGX to ensure no conflict of interest - when the public and market players do not perceive this to be so. Now that the Monetary Authority of Singapore (MAS) is looking into reviewing the structure and practices of the securities industry, it should consider looking into this dual role of SGX.
Circuit breakers are handy in absorbing sudden shocks as exceptions in the stock market. But by no means can they cope with erratic and wild swings in prices as the norm - which would be the case with HFT introduced. We hope SGX will take a holistic relook at the picture.