From the Straits Times,
“THE Singapore Exchange (SGX) is investing $250 million in a new state-of- the-art trading system that will be the world’s fastest – more than 100 times faster than its current system. As part of the initiative, the SGX will also build a powerful new data centre. The moves are part of an ambitious plan by chief executive Magnus Bocker to attract a new breed of global investors to Singapore: high-frequency traders. Mr Bocker believes the lightning-fast new system will prove irresistible to many of these traders who make rapid- fire huge bets based on tiny movements in share prices. For these traders, placing an order to buy or sell a tiny fraction of a second faster can mean big bucks. Ordinary traders will benefit too, since any big increase in trading volumes owing to an influx of high-frequency traders will mean local investors will be able to get in and out of shares more easily with the sharp rise in liquidity.”
I do agree that high frequency traders will bring in a bulk of liquidity in the market, many times, facilitating as market makers “incidentally”, fulfilling the other side of the buy and sell. But…
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“What about the dangers of a flash crash – the computer-driven high-speed trades that sent the Dow Jones Industrial Average tumbling nearly 1,000 points in a matter of minutes on May 6? Mr Bocker said the SGX would have the tools to protect it from such an event, adding it would develop the skills set to strengthen its capability to ensure operations remain efficient. He did not elaborate.”
In Singapore, high frequency trading is more evident in derivatives than the equities itself. Hence, traders and investors playing the Singapore market have not seen the effects. Although it is mentioned that the system will be ready in the first quarter next year, the interest from high frequency traders may not come in immediately. It depends how well SGX is able to woo them. One way is to look at the average volume. If it spikes up and remain over a long period of time, this means the high frequency players are here. With a bigger volume, SGX may increase their revenue considerably. But, fundamental investors may want to look at the cost of bringing the new technology.
Financial Times reported,
“He said high frequency trading currently accounted for about 28 per cent of derivatives trading on the exchange, but was almost non-existent in equities trading. The SGX is keen to raise the velocity of trading – a closely watched measure of liquidity. That is just over half the average level in Asia, according to the exchange’s own figures.
The latency figure claimed by the SGX is significantly faster than the 250 microsecond standard generally quoted for the Genium iNet technology… Mr Böcker said that a comparable trade in the derivatives market today would take 3,000-5,000 microseconds in Singapore, 150,000 microseconds in Hong Kong, 80,000 microseconds in Seoul and 5,000 microseconds using the newly introduced Arrowhead system in Tokyo
…Gan Seow Ann, SGX head of markets, said more than 40 per cent of broking members had already signed up to the new system, which will be rolled out from the first quarter of next year.”
To gain more insights of the effects of high frequency trading, read this New York Times article, “Stock Traders Find Speed Pays, in Milliseconds“. I have also extracted some important points from it:
“They can spot trends before other investors can blink, changing orders and strategies within milliseconds.”
“High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.”
“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext.
These are what I predict about the market in the future if high frequeny trading has a huge presence
– market becomes more efficient, news and changes to stocks would be reflected very fast
– volatility would reduce, making it harder for short term traders to profit
– transaction costs for shares would reduce due to high liquidity (established brokerage firms will face tough competition from small and inexpensive brokers)
– market crashes would happen in a flash as compared to the past where it may take days, weeks and months
This move is inevitable as we progress to a more technology driven future. The market may appear in another form, but the emotions and behaviour of the investors remain the same. Financial crashes will still happen, and with such fast execution, the amount of time for the market to drop is shrunk. Do not be surprised and be forewarned.