Business

Monday February 13, 2012

High-frequency trading soon

CORPORATE PORTRAIT
By DANIEL KHOO


BURSA Malaysia is quickly gearing up its regulatory infrastructure and hardware to deal and cope with the new style of trading the stock and derivatives market amongst hedge funds called high-frequency trading.

The stock exchange operator had last year just introduced and allowed high-frequency trading not on the local stock exchange yet but on the derivatives market for the moment. Observers say this style of trading will be allowed on the stock exchange sooner or later following the continual evolution of markets in this new era of technology.

Indeed, high-frequency trading, which allows very quick split-second execution of trades as all decisions are made automatically by the computer's preprogrammed artificial intelligence (AI) algorithms, will most likely be a new source of income for Bursa as it will see quicker growth of profits given that it derives its revenue from every trade that goes through the exchange.

Bursa, which held a press briefing when it announced its financial results for 2011, said it would see further growth in high-frequency traders as this was the new style of trading which was presently in demand by the market professionals and which at the moment still belonged to the echelons of the elite hedge fund traders.

More earnings: High-frequency trading, which is more prevalent in the West, will most likely be a new source of income for Bursa Malaysia. –AFP

High-frequency trading currently attributed to 6% of trades on the Bursa derivatives market, according to CEO Datuk Tajuddin Atan.

The role of these high-frequency traders in moving markets in a huge and significant way is coming into prominence especially in the West, more specifically in the present financial capital of the world the United States.

The Dow Jones Industrial Average's 2010 Flash Crash as it is known, happened when worries on the Greece and Europe's economic crisis came into the forefront of investors mind.

The 2010 Flash Crash incident happened on May 6, 2010 when the Dow plunged as much as 1,000 points (almost 10%) from its opening for a brief period of time and then within a few minutes quickly recouped most of these losses, shocking the entire financial world with the huge volatility.

The 2010 Flash Crash had been attributed to these high-frequency trading systems which are being used by hedge funds and allows very quick split-second decision making on whether to go long or short on the markets, leaving these crucial buy and sell decisions not to human intelligence, but to computerised artificial intelligence which are also known as robots.

When asked during the briefing on why Bursa had decided to introduce and allow high-frequency traders on the local derivatives market, Tajuddin said this trading style introduced more liquidity to the markets. It is to be noted that liquidity is one of the criterions dictating whether a security is traded by hedge funds and fund managers.

“Markets are about liquidity, as they say, liquidity begets liquidity. And these (high frequency traders) are providers of liquidity,” he said.

Bursa Malaysia Derivatives Bhd CEO Chong Kim Seng said high-frequency trading was a new style of trading now being utilised by market players and that it was in demand. He said should Bursa not cater to this new style of trading, it would exclude the potential liquidity from this group of people which was expected to grow in the years to come.

Indeed, figures released by Bursa for 2011 showed an exceptional growth on the derivatives market front where trading revenues from derivatives saw a staggering annual growth of 36% to RM51.2mil. Total derivatives contracts traded also surged by 37% to 8.45 million, and foreign and domestic participation in the market grew by 57% and 30% respectively.

Also to be noted is that FTSE Bursa Malaysia KLCI Futures (FKLI) is also traded on the derivatives market and had recorded an annual growth of 24% to 2.48 million contracts traded in 2011.

With this new development, comes the challenge for market regulators all over the world to ensure proper systems and regulations are in place to cope as markets continue to evolve.

The AP reported that the US-based Commodity Futures Trading Commission (CFTC) was taking this new class of traders seriously and had just announced that it would create an advisory panel to possibly decide on new rules for automated and high-frequency trading.

The CFTC estimated that automated and high-frequency trading now accounted for an estimated two-thirds of all trades on the US stock exchanges.

On the London Metal Exchange, meanwhile, high-frequency trading in metals was expected to rise to 20% of volumes in a few years from 5% at present, according to a report by Bloomberg which quoted the Marex Spectron Group, a provider of high-frequency trading services in the UK as saying.

For Bursa, its challenge will be to continually update and adapt its regulatory surveillence systems to more closely monitor the behaviour of these high-frequency traders to ensure market integrity, discipline and transparency like it has been routinely doing the stock exchange.

  • E-mail this story
  • Print this story
  • Bookmark and Share