High frequency trading. Is it good or bad for us?
Trading thousands of different securities at smoking fast speed is no longer fanciful now. High Frequency Trading (HFT) takes place in various stock exchanges, both the official and unofficial one. Some said HFT will make the stock market more volatile as there is a lack of transparency in the the way computers trade, while some argue that HFT is not responsible for market volatility. No matter which direction HFT development is heading to, its implication on retail investors is undoubtedly far reaching but many investors have only little knowledge about HFT.
Although high frequency and algorithmic trading now accounts for over 70% of all equity trades placed on US exchanges and in excess of 77% in the UK , HFT as a matter of fact is still not very developed in the HK stock market in part due to high transaction cost compared with that in the Euro or US stock market. As scholars stated, the cost of high HKEX levy and HK stamp duty fee drive small and medium sized HFT traders away. As a result this lowers down the trading volume in the market and limits the size of dark pool expansion in Hong Kong. Traders usually choose not to perform HFT under the present conditions as its potential benefit is not significant.
HFT has added value to the stock market in terms of tripling volume, reducing stock spreads and transaction costs, and providing high liquidity. Unlike the US stock market in which HFT development is likely saturated, it is obvious that HFT will continue to play a great role in the Hong Kong stock market development. To let HFT bloom in a way that will not hurt investor confidence and will not distract company capital raising process is crucial. For the above reasons financial regulators should make every effort to ensure that HFT activities in Hong Kong are closely monitored.
