As the controversy surrounding high-frequency trading (HFT) continues to unfold during the National Assembly's Financial Services Commission audit, industry professionals are emphasizing the need to address the structural issues of foreign HFT entities artificially increasing volatility in the domestic stock market.
HFT is a trading technique that utilizes ultra-fast computer networks and high-performance algorithms to place and cancel large orders in fractions of a second (milliseconds), profiting from minute price differences. Unlike traditional investing that focuses on long-term stock holdings based on company value, HFT involves executing tens of thousands of buy and sell orders within a single trading day, often reducing holdings to nearly zero by market close to avoid volatility risks.
According to the financial investment industry on the 26th, there is a consensus among industry players that the statistics submitted during the recent audit indicate a need to examine the misuse of LP licenses and the adverse effects of indiscriminate HFT-style trading.
The real reason why operators in Yeouido remain wary of foreign HFT is multifaceted. Practitioners, including equity fund managers at private asset management firms, cite the manipulation of prices for major stocks like Samsung Electronics and SK Hynix, as well as the interconnected algorithms between derivatives and exchange-traded funds (ETFs), as core issues.
Industry insiders explain that foreign HFT entities strategically utilize large-cap stocks with high ownership and market capitalization to disrupt intraday supply and demand. Their typical trading pattern involves alternating between selling major stocks and buying derivative ETFs. Initially, they may sell a portion of their large-cap stock holdings to momentarily drive down prices while simultaneously purchasing inverse 2X ETFs to maximize profits from the decline. They then sell the inverse ETFs for a profit and immediately buy 2X leveraged ETFs. Finally, they repurchase the previously sold stocks at a lower price, driving prices back up and securing additional profits from the leveraged ETFs.
While foreign net purchases of ETFs are recorded as zero after market close due to the offsetting nature of buying and selling, this rapid trading disrupts the convergence of fair value and maximizes volatility during the trading day. A manager at a private equity firm noted, "It is a well-known fact among operators monitoring intraday supply and demand that while foreign entities shake the market, it distorts the fair value of stocks."
Concerns have also been raised regarding the effectiveness of measures introduced by financial authorities to prevent overheating in leveraged ETFs, such as increasing the basic deposit requirement (30 million won) and enhancing pre-education. Critics argue that these deposit regulations do not pose a barrier to foreign HFT entities with substantial financial power, but rather restrict the flexible capital management and responses of individual investors.
A private fund manager stated, "The 30 million won deposit threshold is meaningless for powerful foreign entities, while individual investors already burdened by stock price declines are further hindered from averaging down due to additional deposit requirements, exacerbating their losses."
Consequently, the financial investment industry suggests implementing targeted regulations, such as 'daily trading limits per account' and 'minimum bid maintenance times,' to protect the liquidity-providing functions of LPs while addressing the disruptive activities of foreign high-frequency traders.
One industry representative emphasized, "If we regulate based solely on fragmented statistics without accurately understanding the concept and structure of HFT, we will miss the mark. It is urgent to improve the system to maintain normal liquidity provision by LPs while reducing the disruptive power of high-frequency arbitrage entities."
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.