Thailand’s plan to increase scrutiny on high-frequency trades — in effect from Monday — follows steps from China, where programmed trading will soon be subject to real-time monitoring. While authorities expect the moves to enhance transparency, the growing control over certain trades has raised concern that liquidity may tighten and make those markets overall less attractive.
“The current trend of regulators tightening the regulation of high frequency trading is somewhat understandable but also worrying,” said Gary Dugan, chief executive officer of the Global CIO Office. “The activity of the HFT funds also brings liquidity to the markets – better liquidity should lead to the improvement in the efficient pricing of assets.”
The controversial nature of such restrictions is on full display in South Korea, where a short-selling ban hurt its attempts to win an upgrade from MSCI Inc. These developments show the difficulties policymakers have in keeping up with increasingly sophisticated trading strategies and their impact on financial markets, a challenge that’s only set to grow with the adoption of artificial intelligence.
The restrictions, typically introduced when stock markets were under pressure, have managed to stop the bleeding but their longer-term impact is under debate given the growth of computer-aided trading.
Quantitative strategies are based off data science and systematic techniques, with some using big data to time markets, follow trends or execute arbitrage trades.
China’s clampdown on quant trading came in February when the stock market was at multi-year lows. With the added support from purchases by state funds, shares staged a rebound but have started to fall again since late May.
Thailand’s SET Index has fallen about 8% this year, turning it into one of the region’s worst country benchmarks. The stock exchange said it will require high-frequency traders to register before they can place orders. The measures are part of a package of rules to restore calm amid concern over the impact of illegal short selling, program trading and corporate scandals.
“Policymakers in these markets might view volatility as the primary culprit for underperformance,” said Hebe Chen, an analyst at IG Markets Ltd. “In smaller markets like Malaysia, where the combination of performance and volatility is more similar to China and Korea, the odds of creating their own safety net can’t be ruled out.”
Chen added that countries that are more closely connected to global investors, such as Japan and Singapore, are unlikely to apply such restrictions as they seek to align with the “universal rules of the game.”
ETMarkets.comAs restrictions look set to stay for now, market watchers warn of a chilling impact on trading activities and a potential blow to the governments’ reputation.
China’s quantitative hedge funds saw their assets drop in the first quarter for the first time since late 2022, according to estimates by Citic Securities Co.
In South Korea, quant funds are eyeing elsewhere as the government extended the short-sale ban through the end of March 2025.
“As it became impossible to employ various strategies in South Korea, they are saying good-bye to the South Korean market and doing arbitrage trades instead in Japan and Hong Kong,” said Jung In Yun, chief executive officer at Fibonacci Asset Management Global Pte.
To be sure, some have welcomed the restrictions as they can reduce short-term speculative trades. George Molina, head of trading for Templeton Global Investments, said the rules are “needed to adjust for what were arguably loopholes in the system.”
It’s a view echoed by Wei Li, multi-asset quant solutions portfolio manager for BNP Paribas Asset Management, who said such measures can contribute to a more stable and transparent market environment and ultimately benefit all participants.
Governments in advanced countries including the US and Europe have also resorted to temporary restrictions in times of financial stress, such as the 2008 ban on short selling of financial stocks in the US and various curbs at the onset of the pandemic.
The “ultimate impact” will depend on how well regulations are balanced to protect investors without stifling market efficiency and innovation, said Charu Chanana, a strategist at Saxo Markets. “AI can lead to more algorithmic trading that remain prone to sudden and extreme market movements. Regulation in Asia will likely be slow to respond to developments in AI, and precautionary measures may therefore remain more stringent.”