High-frequency trading (HFT) is algorithmic trading characterised by high speeds, high turnover rates, and high order-to-trade ratios. Unlike traditional human investors who buy and hold assets for long periods to derive profits from market appreciation, HFT firms use computers to trade massive amounts of stocks in fractions of seconds with minimal human intervention.
Of course, humans are still involved in the process because computers can’t think or act independently. A team of quantitative analysts who develop mathematical models programmed into computerised systems oversee the operations (check out Saxo for more info). The goal is to identify arbitrage opportunities across markets and exchanges where they deal most frequently due to low between interactions. Don’t let the complicated jargon fool you. It means that computers can recognise trends better than humans, enabling them to buy low and sell high.
The industry has become a multi-billion dollar business, so it’s no surprise that regulators worldwide have been trying to curb this activity by imposing regulations. But the real question is whether these regulations will effectively reduce HFT activities or if they’ll cause even more problems.
Several countries have different legal mandates imposed on HFT firms. Still, each country also has its own unique set of rules and regulations, complicating things for investors interested in understanding how high-frequency trading works globally.
This article will discuss the intricacies of high-frequency trading in Asia and examine some of the concerns surrounding this type of system and why investors need to recognise what high-frequency trading is and how it can work to their advantage or disadvantage depending on a variety of factors.
What is high-frequency trading?
High-frequency trading (HFT) is an investment system where traders use automated systems to transact large securities. The transactions are usually done at extremely high speeds. These transactions are carried out in fractions of seconds with the help of electronic systems and tools. High-frequency traders do not hold the securities for more than a few hours or even minutes to gain small profits. This kind of trading has become popular since 2009 after US market regulations were relaxed, giving rise to new rules on HFT activity.
Why Hong Kong?
HK is becoming an attractive destination for high-frequency traders due to its favourable regulations, tax structures, and low trading fees compared to other markets like Tokyo, Singapore, and London. Even though there is stiff competition from other Asian markets, traders are attracted to the city due to its proximity to China. The Chinese market has been growing significantly in recent years, creating a vast potential for investment opportunities.
What are the risks involved?
HFT involves significant amounts of risk trading because it involves substantial money. In several instances, high-frequency trading activity has led to extreme volatility, resulting in severe consequences like flash crashes. A Flash crash is an extremely rapid decline or rise in stock price caused by panic sales or purchases due to computerised transactions that overrule human judgement. It results in investors incurring billions of dollars’ heavy losses before prices stabilise again, which can take hours or even days.
Are high-frequency traders ethical?
High-frequency trading is not illegal, and you can argue that they provide liquidity and narrow spreads which benefits other investors. However, the activities of high-frequency traders are often accused of causing flash crashes. Critics also say that this kind of activity increases risks for average investors who make investments for the medium to long term by influencing prices. All these factors come together to create a significant ethical dilemma.
Is there any future in Asia?
With the HFT market expanding rapidly across global markets, Asia has seen tremendous growth in HFT activity. Due to stricter regulations and increasing competition from other Asian markets like Singapore and Hong Kong’s share in the global HFT market is decreasing. It might not be accurate for long as the Hong Kong government has recently announced its plans to reduce tax on HFT activities.