Should HFT be allowed in SGX?

Below is part of an article appearing in ‘TABB Forum, Where capital markets speak’, in response to Congressman Markey’s call for an immediate ban on HFT.
 
‘Congressman Markey, in a letter to the SEC on January 18, declared that HFT “represents a clear and present danger to the stability and safety of [US] capital markets and that it should be curtailed immediately.” Direct and to the point.
Congressman Markey backs this assertion with evidence drawn from market events, such as the Flash Crash and Knight Capital, as well as academic studies on the impact of HFT on markets and, therefore, Main Street. If I can synthesize his argument, essentially he states that:
 
1. The speed of HFT disadvantages other styles of trading.
2. HFT exacerbates volatility in the market.
And as a result …
3. ‘Other’ investors are scared away; and
4. Volume traded by HFT is therefore a dangerously high proportion of overall traded volume.
 
While I favor “working with HFT to address perceived dangers,” I have to say I see a thread running through the Congressman’s letter that I both agree with and, like the Congressman, find disturbing:
 
While most HFT is actually just normal-but-very-quick-trading, HFT strategies typically profit from very short-term pricing anomalies between two or more products or liquidity sources. Volatility in the market as well as market fragmentation and the lack of adequate consolidated price feeds in some (many?) markets generate these anomalies and make it easier for HFT strategies to succeed. In fact you might argue engineering volatility -- at the very least, exacerbating it -- is in the interest of HFT strategies.
 
As someone who is primarily concerned about the performance of long-only funds and future planning, this sounds unnerving; but it’s actually OK (just about OK, that is) if the volume traded by HFT is a small percentage of the total market. It’s a faint background noise. However, when HFT becomes a large, or even dominant, force in the market, then ‘other’ investors genuinely do have a reason to stay away. Who wants to play in a market where movement for movement’s sake has overtaken fundamentals? No thanks -- I’ll let the HFTs spar in a zero-sum game or volatility ping pong and stick my cash under the mattress....’
 
The position of Hildyard and some supporters of HFT is that it should not be banned but be controlled and managed. Presumably HFT can be controlled and managed. Below are a few comments to his article.
 
05 February 2013
any part of our industry that has a market share over 50 % is alarming and wrong .Here is where the exchanges board delivers correct governance to balance the correct order of play . Finally an automated kill switch is very simply applied as you refuse his key entry.
wsteetpro
 
05 February 2013
I fully agree. It's a matter of time before the markets go into another tailspin - HFTs produce zero economic output. Just skimming off other market participants. Capitalism at it's best!
Anonymous
 
05 February 2013
if they are using other investors as a profit engine (my perception) then there are real problems with the current market structure. Why would anyone want to invest in something when they know that others are embezzling their money out of the other side of the building?
John Harris
 
05 February 2013
Yes, by all means, let's have more government mandates. We can't have businesses deciding for themselves how to interact with their customers. If left to their own devices, exchanges and other market centers are certain destroy themselves, bankrupt their shareholders, and leave U.S. capital markets with no secondary markets at all....
crammond1964
 
05 February 2013
the problem being that a number of exchanges are lying in the same bed as the HFT ; therefore making a debate rather futile .
Exchanges deny their manipulation and HFT survive off the exchanges ridiculous rebate system .
shamlet76
 
05 February 2013
i think the market is broken. you have phony financials because of the off-balance sheet arrangements, you have market "gaming", which is fraud. shortselling and HFT is dominant. both shortselling and HFT is a capital outflow from the stock market. regulators have disregarded the investors' concerns, which is aiding and abetting shortselling and HFT. banks have become the enemy of their customers. current rules are not enforced. this isn't capitalism. it is a plutocracy.
if HFT was not harming the market, then they should explain where their $ is coming from? we know where it's going to - their pockets.
neither HFT nor shortsellers are investors. they are speculators, traders. but the global economy won't be able to get on it's feet as long as those money movements are taking place. when speculators become dominant, the markets lose.
honestman
 
05 February 2013
It is unfortunate that so many people offering comments have not read even the most fundmental text on direct digital control of processes used in any undergraduate Chemical Engineering curriculum in any accredited university. In something called closed loop control, a computer calculates the difference between the desired value for a process output and the actual value for the process output. Using that difference the computer makes a change in what is termed a "manipulated variable" that afffects the value of the process output. The process output is the price of a share of the stock whose price is being manipulated, the manipulated variable is the quantity of the stock offered for sale in a naked short sale. The computer can monitor the price of the stock as it is sent downward and can enter a buy at the appropriate point to avoid triggering a stock market "time-out" on the stock.
 
To increase the price of a stock, consecutive orders for a large number of shares are placed.
 
A computer program can monitor the effect of the sell orders and decide what action to take. The problem is compounded when large, privileged customers can see the order book and know what orders are out there. To help the manipulation along, rumors and half-truths can be instituted by "analysts".
Ignorance of basic control of chemical reactors is not an excuse for being stupid and saying the same jibberish over and over again in a meaningless diatribe that is full of sound and fury and signifies nothing but stupidity.


There are pro and against HFT camps. The reasons are obvious. The small investors will be outclassed and stand to lose their pants. It is like putting in a few vacuum cleaners to suck clean the small investors.
 
In a small market like SGX, the most fear factor mentioned, ie the dominance of HFT trades in volumes, will kill all the small investors for sure. Can the small investors of SGX survive the overwhelming presence of HFT and the huge volumes they created and monopolised the trading in the market? This unfair trading practice is dangerous to the big markets like NYSE. How can it be safe to a teeny weeny market like the SGX? The small investor will surely be mauled and the market will go ‘bonk’ for sure.
MAS and the Govt must seriously look into the introduction of HFT in SGX and don’t end up in a bigger mess than the Lehman bonds crisis. Knowing the risk, the unfair advantages and dangers of HFT, and to allow it to be introduced into our market is simply irresponsible and inexcusable.
 
If the MAS is adamant in wanting to have HFT in SGX, then it should be well advised to listen to Liquidnet founder and CEO Seth Merrin.
‘Merrin proposes the SEC create "HFT-free zones" to protect retail investors who wish to trade in a separate and slower lane while allowing HFT to continue. Retail investors, he says, should have the option and the opportunity to decide if they want to interact in the HFT zone.’