During a recent National Assembly audit, criticism was directed at the Korea Exchange and foreign high-frequency trading (HFT) entities, prompting concerns within the financial investment sector regarding the underlying assumptions and logical structure of the lawmakers' critiques.
On October 8, Rep. Kim Hyun-jung of the Democratic Party claimed that following the listing of leveraged exchange-traded funds (ETFs), HFT trading volumes surged, with foreign HFT entities allegedly exploiting rebalancing volumes at market close to increase volatility and manipulate prices. This has led to calls for a review of the exchange's governance structure and the separation of its public functions.
Industry professionals are particularly concerned about the methodology used to compile HFT statistics and the distinction between the roles of liquidity providers (LPs). According to capital market law, LPs are market makers required to submit two-way quotes to alleviate imbalances in buying and selling ETFs. This process involves algorithmic submissions and corrections, yet the HFT trading volume statistics presented in the National Assembly include LPs' liquidity-providing trades.
An industry representative stated, "LPs are entities that provide liquidity by simultaneously submitting buy and sell quotes as per their designated obligations. Classifying normal trading activities of LPs as HFT and blaming them for increased volatility reflects a misunderstanding of the system."
Critics also argue that attributing volatility or price manipulation solely based on trading volume is inappropriate. Large buy and sell transactions at specific price levels can significantly increase trading volume without necessarily causing stock price fluctuations. Thus, a detailed analysis of order books and transaction records is essential before drawing conclusions about volatility.
Furthermore, the involvement of foreign HFT firms in the exchange's derivatives advisory committee has been labeled as preferential treatment. However, it is explained that major overseas exchanges typically engage specialized financial firms as advisors for managing derivatives markets and liquidity.
In response to industry concerns, Rep. Kim's office clarified that the focus is not on undermining the LP function itself but rather on addressing potential abuses of LP licenses for HFT-style trading or fraudulent activities.
Currently, the Korea Exchange is conducting research with external institutions, including the Korea Financial Research Institute, to assess the actual impact of HFT on domestic market liquidity and volatility based on large order and transaction data.
A source familiar with the exchange's situation cautioned, "Discussing regulatory enhancements based on estimates or fragmented data before precise verification of HFT's impact is unwise. Changes to the system not grounded in clear analysis could lead to adverse effects, such as reduced market liquidity."
* This article has been translated by AI.
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