Financial authorities have announced plans to address high-frequency trading (HFT). Byun Je-ho, head of the Capital Markets Bureau at the Financial Services Commission, stated on September 28, "We are considering appropriate regulatory measures for high-frequency trading that increases market volatility." This marks the first official mention of HFT regulation by the authorities. However, some critics argue that this response is overdue, as concerns about HFT have been raised for quite some time.
HFT involves using computer algorithms to execute a large number of orders in a short period. It allows for thousands of trades per second, primarily utilized by institutional investors and foreign entities. Since early this year, various issues related to HFT have emerged, notably the excessive proportion of HFT transactions in overall trading.
According to data submitted by the Financial Supervisory Service to a member of the National Assembly, trading volume from 2,266 HFT accounts registered on the Korea Exchange reached approximately 392.7 trillion won in February. This accounted for 58% of the total trading volume of 679.7 trillion won during the same period, indicating that more than half of market transactions were filled with HFT orders.
While HFT is not inherently negative, as it is recognized for enhancing liquidity and reducing trading costs, the authorities lack a comprehensive understanding of who is conducting these trades and how. Although the Korea Exchange monitors trends, there is effectively no systematic regulatory framework in place. Discussing the need for regulation without a clear understanding of the situation presents significant limitations.
Particularly concerning is the fact that HFT is predominantly led by institutions and foreign investors. Individual investors find it challenging to compete with these entities in terms of order speed and information processing capabilities. The potential for ultra-short-term trading in the futures market to disrupt the spot market and increase volatility cannot be dismissed.
Moreover, the adverse effects of HFT could intensify in highly volatile market conditions. Experiences from June and July support these concerns, as a surge in HFT coincided with a focus on the semiconductor sector and the expansion of single-stock leveraged ETF trading, leading to increased volatility followed by sharp corrections. While it cannot be definitively stated that HFT was the cause of these corrections, this case illustrates how leveraged products and ultra-short-term trading can amplify volatility. Without establishing causal relationships, similar incidents are likely to recur.
Therefore, the immediate priority should be to assess the current situation. A systematic analysis of trading volumes by account, order modification and cancellation rates, profit and loss by investor type, and instances of market impact should be conducted and made public. It is crucial to closely examine the role of foreign HFT firms in the leveraged ETF market. Based on this analysis, criteria should be established to differentiate between normal liquidity provision and market disruption. Given that excessive regulation could stifle liquidity, it is essential to carefully consider international examples and market impacts in designing appropriate measures.
Simply suppressing HFT is not a viable solution. However, if we do not fully understand how transactions that account for more than half of the market are conducted and their impacts, it is difficult to claim that the market is fair. Financial authorities, the National Assembly, and the exchange must transparently disclose the realities of HFT before engaging in regulatory discussions and promptly establish a rational regulatory framework based on the findings.
* This article has been translated by AI.
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