The controversy surrounding high-frequency trading (HFT) has sparked differing views on whether to include liquidity provider (LP) trading records during the National Assembly's Financial Services Commission audit. Amid this, industry professionals emphasize the need to address the structural issue of foreign HFT entities artificially increasing volatility in the domestic stock market.
HFT employs ultra-fast computer networks and high-performance algorithms to execute and cancel large orders in milliseconds, profiting from minute price differences. Unlike traditional investing that focuses on long-term value, HFT involves executing thousands of buy and sell orders within a single day, often reducing holdings to nearly zero by market close to avoid volatility risks.
According to the financial investment industry on October 26, the recent audit revealed HFT statistics that included LP trading records, leading to controversy. However, both lawmakers and industry representatives agree on the need to examine the misuse of LP licenses and the adverse effects of indiscriminate HFT-style trading.
Despite the ongoing debate over LP statistics, local operators remain wary of foreign HFT for specific reasons. Fund managers from private equity firms cite the manipulation of stock prices for major companies like Samsung Electronics and SK Hynix, as well as the algorithms linking derivatives and exchange-traded funds (ETFs), as core issues.
Industry insiders explain that foreign HFT entities strategically disrupt the supply and demand of large-cap stocks by leveraging their significant holdings. Their typical trading pattern involves alternating between selling major stocks and buying inverse ETFs. They first sell a portion of their large-cap stock holdings to temporarily drive down prices while simultaneously purchasing inverse ETFs to maximize profits from the decline. They then sell the inverse ETFs for a profit and immediately buy 2X leveraged ETFs, ultimately repurchasing the previously sold stocks at a lower price to drive prices back up and secure additional profits from the leveraged ETFs.
While foreign net purchases of ETFs are recorded as zero after market close due to offsetting sales and purchases, this high-frequency trading disrupts price discovery and amplifies volatility throughout the trading day. A manager from a private equity firm noted, "It is a well-known fact among operators monitoring intraday supply and demand that foreign entities distort the fair value of stocks while shaking up the market."
Concerns have also been raised regarding the effectiveness of measures introduced by financial authorities to curb the overheating of leveraged ETFs, such as increasing the basic deposit requirement to 30 million won and enhancing pre-training. Critics argue that these deposit regulations do not pose a barrier to foreign HFT entities with substantial capital, instead restricting the flexibility of individual investors in managing their funds.
A private fund manager remarked, "The 30 million won deposit threshold is meaningless for powerful foreign entities, while individual investors already burdened by falling stock prices are further hindered from averaging down their costs due to additional deposit requirements, exacerbating their losses."
As a result, the financial investment industry suggests that while the role of LPs in providing market liquidity should be thoroughly protected, targeted regulations such as 'daily trading limits per account' and 'minimum bid duration' should be implemented to address foreign high-frequency trading entities that disrupt both spot and derivative markets.
One industry representative emphasized, "Regulating based solely on fragmented statistics without a clear understanding of HFT concepts and structures can lead to misguided policies. It is urgent to improve regulations that preserve normal liquidity provision by LPs while diminishing the disruptive power of high-frequency trading entities."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.