Today Online’s Take on Promoting High-Frequency Trading in Singapore

As reported by Today Online’s Alex Lew and Leong Sze Hian, 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 speed 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?

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.

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