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High-speed traders,short sellers face Asia crackdown

Regulators in Asia have tightened the screws on trades popularamong hedge funds as stocks slump, an attempt to stabilise markets that someworry may end up stifling key strategies.

Thailand’s plan to increase scrutiny on high-frequency trades –in effect from Monday – follows steps from China, where programmed trading willsoon be subject to real-time monitoring. While authorities expect the moves toenhance transparency, the growing control over certain trades has raisedconcern that liquidity may tighten and make those markets overall lessattractive

The current trend of regulators tightening the regulation ofhigh frequency trading is somewhat understandable but also worrying,” said GaryDugan, chief executive of the Global CIO Office. “The activity of the HFT fundsalso brings liquidity to the markets – better liquidity should lead to theimprovement in the efficient pricing of assets.”

The controversial nature of such restrictions is on full display in SouthKorea, where a short-selling ban hurt its attempts to win an upgrade from MSCI. These developments show the difficulties policy-makers have in keeping up with increasingly sophisticated trading strategies and their impact on financial markets, a challenge that’s only set to grow with theadoption of artificial intelligence.

The restrictions, typically introduced when sharemarkets areunder pressure, have managed to stop the bleeding but their longer-term impactis under debate given the growth of computer-aided trading

Quantitative strategies are based ondata science and systematic techniques, with some using big data to timemarkets, follow trends or execute arbitrage trades.

China’s clampdown on quant trading came in February when thesharemarket was at multi-year lows. With the added support from purchases by state funds, shares staged arebound but have started to fall again since late Ma

Chilling impact

Thailand’s SET Index has fallen about8 per cent this year, turning it into one of the region’s worst countrybenchmarks. disallowed said it would require high-frequency traders toregister before they can place orders. The measures are part of a package ofrules to restore calm amid concern over the impact of illegal short selling,program trading and corporate scandals.

“Policy-makers in these markets mightview volatility as the primary culprit for underperformance,” said Hebe Chen,an analyst at IG Markets. “In smaller markets like Malaysia, where thecombination of performance and volatility is more similar to China and Korea,the odds of creating their own safety net can’t be ruled out.”

Ms Chen added that countries that aremore closely connected to global investors, such as Japan and Singapore, areunlikely to apply such restrictions as they seek to align with the “universalrules of the game”.

As restrictions look set to stay fornow, market watchers warn of a chilling impact on trading activities and apotential blow to the governments’ reputation.

China’s quantitative hedge funds saw their assets drop in thefirst quarter for the first time since late 2022, according to estimates byCitic Securities.

In South Korea, quant funds are eyeing elsewhere as thegovernment extends the short-sale ban through the end of March next year.

“As it became impossible to employ various strategies in SouthKorea, they are saying goodbye to the South Korean market and doing arbitragetrades instead in Japan and Hong Kong,” said Jung In Yun, CEO at FibonacciAsset Management Global.

Some have welcomed the restrictions as they can reduceshort-term speculative trades. George Molina, head of trading for TempletonGlobal Investments, said the rules were “needed to adjust for what werearguably loopholes in the system”.

It’s a view echoed by Wei Li, multi-asset quant solutionsportfolio manager for BNP Paribas, who said such measures could contribute to amore stable and transparent market environment and ultimately benefit allparticipants

Governments in advanced countries including the US and Europehave also resorted to temporary restrictions in times of financial stress, suchas the 2008 ban on short selling of financial stocks in the US and variouscurbs at the onset of the pandemic.

The “ultimate impact” will depend on how well regulations arebalanced to protect investors without stifling market efficiency andinnovation, said Charu Chanana, a strategist at Saxo Markets. “AI can lead to more algorithmic trading thatremain prone to sudden and extreme market movements. Regulation in Asia willlikely be slow to respond to developments in AI, and precautionary measures maytherefore remain more stringent.”