HFT in Asia: Panic?
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2 June 2010
HFT or high frequency trading has been in the spotlight of late – particularly after the recent 1,000 point intra-day plunge at the NYSE. Constituting ~50% of equities volume in the US according to our estimates (see graph below), market participants in Asia were alarmed by the potential impact that HFT could have on domestic exchanges. High frequency trading still has a long ways to go in Asia, though the Japanese and Australian equities markets have seen some penetration. Largely-enabled by TSE’s new faster arrowhead system (actual latency of 2 ms which is 1000 X faster than the previous matching rates of 3-5 s), HFT should see growth in Japan especially from foreign quant funds and prop. trading firms. But will we witness the kind of dramatic plunge on the TSE as we did last month on the NYSE? Chances are low in the short-medium term as the rate of HFT in Japan is not expected to reach US levels anytime soon (ie. Significant % of volumes to effect such sensitivity to intra-day price movements and intra-day volatility) but a more important lesson which would prevent a repeat of that incident would be the need to regulate HFT with additional responsibilities on automated high-speed market makers and high-frequency trading firms (e.g mandatory quote activities and restrictions on the number of cancelled orders) and greater transparency in post-trade reporting. However, high-frequency trading does provide valuable functions in terms of liquidity provisioning and facilitates competition around latency and trading efficiency which would be hugely beneficial to Asian markets. Thoughts?
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