25 February 2020
US exchanges charge trading cost of 1/10,000 of 1 percent for program trading. The government encourages high-frequency trading. Photo: Reuters
US exchanges charge trading cost of 1/10,000 of 1 percent for program trading. The government encourages high-frequency trading. Photo: Reuters

More regulations needed for high-frequency trading

In a previous article, I mentioned that inefficient supervision of program trading and high-frequency trading could shake the stock market.

In fact, these two types of trading activity have existed overseas for some time and is becoming a trend in Hong Kong and mainland China.

Some companies such as Renaissance Technologies have achieved pretty good results.

Program and high-frequency trading usually involves simultaneous automated orders based on pre-determined conditions.

Some program trading models incorporate some “human thinking” and generate more stable performance.

Some funds have very powerful systems which can monitor online forums often visited by thousands of investors or traders.

The system can predict the views and possible actions of investors from their messages.

Hence, these funds would move faster than others and impact the prices of investment targets.

I have been studying program trading and high-frequency trading.

In order to build such a trading model and develop the system, we need people with strong mathematics skills and program-writing capabilities.

They’re not easy to find or organize.

Singapore has done quite well in attracting financial institutions and promoting financial innovation because of its ample high-end talent pool.

But regulators have to understand the operations and principles of the most difficult high-frequency trading.

Hong Kong is not a good place for high-frequency equity trading.

Traders hold stocks for some time to cover the high trading costs. Stock index options and stock options lack sufficient trading volume for high-frequency trading.

However, hedge funds are starting to thrive in the mainland by applying more diverse trading strategies, with more capital and higher leverage ratios.

But things could turn into a disaster if regulations fail to catch up.

There’s still plenty of room for improvement of program trading in the mainland.

At present, domestic exchanges set the same cost for each program trading and rebate some cost for large-volume customers.

By contrast, US exchanges charge trading cost of 1/10,000 of 1 percent for program trading. The government encourages high-frequency trading.

Chinese authorities should lower the trading cost and enhance market oversight to maintain market order and drive program trading.

Program trading already poses a new challenge for the China Securities Regulatory Commission.

There is a lack of talent with good knowledge of program trading and high-frequency trading.

And there’s not enough market supervision system to collect data and determine potential risk.

We’ve seen a mismatch between technology and capability as governments are unable to compete with big hedge funds that hire the best people.

If the authorities have a clear idea of the actual size of off-market financing and umbrella funds, they can spot potential market risk in advance and implement counter measures.

The recent market rout in China partly stemmed from out-of-control off-market financing and lax regulation.

The government had different regulations for futures and for the spot and currency markets and failed to integrate information about various markets to prevent an attack by global speculators.

The battle to defend the Hong Kong dollar shows the significance of a cross-market supervision system.

This article appeared in the Hong Kong Economic Journal on Sept. 1.

Translation by Julie Zhu

[Chinese version中文版]

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adjunct professor in the Department of Finance at HKUST Business School