Retail investors always lose... A way to stop 'ultra-short trades thousands of times per second' has emerged [Park Ju-yeon's Yeouido Compass]

"Thousands of orders per second"

A law finally came amid HFT frenzy

Photo=Getty Images Bank A bill to regulate the so-called high-frequency algorithmic trading (HFT·High Frequency Trading), in which professional investors use computer programs to place and cancel orders thousands of times per second, was introduced in the National Assembly for the first time. As concerns grew that HFT could be abused as a means of market disruption and that system errors could shock the entire financial market, institutional responses are starting in earnest.

Rep. Kim Seung-won of the Democratic Party, a member of the National Assembly's Political Affairs Committee, said he recently introduced as the main sponsor an amendment to the Capital Markets and Financial Investment Services Act to allow the imposition of an "excessive order burden fee" on trades that repeatedly submit, correct, and cancel large volumes of quotes in the stock market. The intent is to provide a legal basis to expand a system that the Korea Exchange currently operates under internal rules only for the derivatives market to the entire stock market and multilateral trading facilities (ATS).

Ultra-short trades impossible for individuals... Blocking 'phantom quotes'

HFT is a trading method in which computer algorithms hold stocks for a few seconds or less and repeat hundreds to thousands of orders and cancellations per second. In this process, orders with no real intention to execute, the so-called "phantom quotes," can accumulate in large numbers and disappear, which has been pointed out as a problem because they can send distorted signals to the market.

While it can have the positive function of supplying quotes to the market and increasing liquidity under normal circumstances, when orders and cancellations become excessive it has the simultaneous limitation of creating the illusion that stock prices are moving independently of actual supply and demand and potentially overloading exchange systems.

In particular, there is continued controversy over structural unfairness in that foreign and institutional investors can execute orders in about 0.001 seconds via direct market access (DMA), while individual investors' order speed is about 0.05 seconds, a difference of up to 50 times.

Flash crash, Citadel... Risks that have become reality

The side effects of HFT have already been confirmed through overseas cases. In May 2010, the U.S. stock market experienced a "flash crash" in which the Dow plunged nearly 1,000 points in just minutes and then recovered. Large sell orders executed by computer programs and HFT were pointed to as major causes of the sharp decline at the time.

Similar cases domestically have also led to sanctions. Financial authorities imposed fines totaling 11.88 billion won on the U.S.-based securities firm Citadel Securities. The Securities and Futures Commission under the Financial Services Commission judged that the company between October 2017 and May 2018 had disrupted market order by artificially attracting buying pressure for certain stocks through high-frequency algorithmic trading and then selling large volumes once prices rose.

The Securities and Futures Commission pointed out at the time, "There is a possibility of artificially altering prices and trading volumes that should be formed by normal supply and demand, and there is a considerable chance of creating the misconception among ordinary investors that 'trading is active.'"

"Let's prevent ultra-short trading in advance"... National Assembly plays the first card

Photo=Yonhap News The biggest feature of this amendment is that it targets the act of large-volume orders for management rather than outright banning HFT itself. It allows exchanges and ATSs to limit order acceptance or impose fees if the submission and cancellation of quotes exceeding a certain level are repeated, even without proving actual intent to manipulate prices.

Until now, the excessive order burden fee system has been operated only as an exchange's self-regulation for the derivatives market. This is the first time that such regulation has been specified by law at the National Assembly level to cover the entire stock market.

Rep. Kim explained that the intention is to elevate a system that had remained in subordinate regulations to law to increase its normative force and eliminate regulatory blind spots.

However, some in the market have raised concerns that imposing costs on orders and cancellations could shrink legitimate market-making activities and reduce liquidity. Accordingly, there is analysis that how precisely the fee imposition criteria and scope of application are designed will determine the effectiveness of the system.

Rep. Kim emphasized, "The capital market should be a field of fair opportunity for all participants, not a playground for certain forces with superior technology," and said, "The excessive order burden fee will serve as a minimum 'traffic light' to prevent market system overload and protect honest investors."

Park Ju-yeon Reporter grumpy_cat@hankyung.com