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Should high-speed traders face increased regulator scrutiny?
High frequency trading (HFT) has taken off in recent years with more trading firms looking to generate better returns on their portfolios using advanced technology.
Darryl Yu 26 Nov 2015
High frequency trading (HFT) has taken off in recent years with more trading firms looking to generate better returns on their portfolios using technology. 
In Japan, for instance, HFT represents 45% of equity trades on the Tokyo Stock Exchange (TSE) according to information from the Bank of Japan. In favor of increasing more activity on its exchange, the Japanese government has made upgrades to their trading systems and put in place regulations to stimulate growth.  
However, while the use of technology may be very efficient for traders, it reveals a problem that regulators may have overlooked. “Normal investors are people who care about the underlying company. They understand that there is a correlation between the price and stock value,” says Seth Merrin, CEO and founder of Liquidnet, a buyside-focused dark pool operator. “HFT traders see no correlation there and they don’t care about the underlying company itself. They only profit by taking advantage of the inefficiencies of the market.”
It’s that type of trading that has gotten institutional investors worried says Merrin in an interview with The Asset. “The institutions find high frequency trading in conflict with what they do. It’s a zero-sum game to the institutions,” he emphasises. “The institutions trigger the supply demand balance which in turn triggers HFT against them. This only costs the institutional investors more money to buy and sell which affects the returns of individuals.”
Currently, the regulatory in landscape in Asia with regards to HFT is fragmented with countries such as Japan and Hong Kong at odds on how to approach HFT on their exchanges. Hong Kong’s Securities and Futures Commission (SFC) for example said that HFT trades were “unprofitable” due to the high stamp duty for ownership transfer of securities.  “In Japan, there is only one stock exchange and the regulators are very much in favour of it,” explains Merrin. “HFT is their golden ticket and right now that is where all their volumes comes out from.”
Misunderstanding between volumes leading to liquidity seems to be the driving force for some regulators to encourage HFT growth in hopes of short-term gains. “If you make institutional investing more expensive and the returns worst you are going to entice less capital into that country,” highlights Merrin. “The regulators should instill and promote the most efficient markets they can possibly have. And instill confidence so that people don’t leave the market.”

However, there are other markets that have taken a practical approach to HFT. In Australia, regulators there were uncomfortable with the growth of HFT in their market so they decided to investigate and take an in-depth look into who were conducting the trades and what kind of strategies they were using. The result was more transparency. “Some regulators are being more proactive about it than others,” says Merrin.       

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