6.0 Current Issues of Algorithmic Trading
6.1 High Frequency Trading
High Frequency Trading (HFT), a fully computer driven platform for trading. A news has unveiled the high-speed trading system nowadays makes up about 6% of trades on the Bursa derivatives market. The former Citigroup vice president said that the ultra high frequency trading (HFT) would be a competitive tool once it is fully introduced and executed in equity market. In 2011, Bursa commented the expectation of growth in HFT as new trading trend which is practised by the elites, the hedge fund traders. This trading system is now widely demanded by the rest of the market in the world.
HFT is a sophisticated electronic based trading technology where the trading speed could be as quick as milliseconds or microseconds. It simply means that the investors could buy and sell the shares in super fast speed with low margin but high frequency in order to earn gains. It is a common trading technological tool used in European and US markets which are about 50 to 70%. Whereas, it is 30 to 40% covers the Asian markets notably in Japan, Hong Kong, Australia, and Singapore.
Perez, a HFT book author said that HFT involves dealing with with very little margins of liquid instruments to generate money. He also claimed that a typical HFT trader is not interested in holding instruments for ovemight or may be longer period than the strategy required. Holding instruments for long time resulted in exposure of additional risks which many traders do not aim for. Hence, it can be said that HFT traders are moving business and not storage business. The author suggested that the HFT systems could be set up in a conducting centre in KL with the goal of minimizing the latency of systems.
For the institutional investors who consider the company’s profits might not keen on high frequency trading where all the information is publicly known. In contrast, dark pooling seems a strategy those institutional investors trading among themselves in a trading venue where all the information is concealed. Long term investors today become more educated and knowledgeable about the trading volume, execution prices, public announcements, even the changes of world. It could totally give the institutional investors and brokers challenges while implementing dark pooling. 6.2 Direct Market Access
In 2008, Bursa introduced Direct Market Access (DMA), a newly introduced computer based trading technology that provided by NYSE Euronext Advanced Trading Solutions to benefit the Malaysian derivatives market. It usually combined with algorithmic trading to provide market participants wider choices of trading strategies. The algorithmic trading or algo trading system operates based on the compilation of computer programs to execute trading orders. In fact, trading process carries out by both algo trading system and human is known as low frequency trading while the fully use of algo trading platform is considered as high frequency trading.
The first Malaysian local stockbroker, TA Securities Holdings Bhd is fully diverted to an advanced electronic platform which rides on Bursa Malaysia Bhd's (Bursa) Financial Information Exchange (FIX) Direct Market Access (DMA) gateway. Its action is to cope up with the directives from Bursa that require all the stock broking firms change their trading platforms to be compatible with the DMA gateway in 2012. N2N Connect has developed a so called TraderConnect Pro (TC Pro) system for helping TA Securities to facilitate trading between dealers and clients on a platform that connected to Bursa’s trading engine directly.
After introducing DMA in derivative market, this was followed by DMA for the equities market in 2009. It gives the buy side and the sell side participants equal rights to handle the order execution. The buyers can approach to the market order book directly. There are though many financial institutions started to use DMA system, but stock broking firms...
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