High-speed traders, short sellers face Asia’s growing crackdown

Thailand’s plan to increase scrutiny on high-frequency trades – effective Monday – follows steps in China, where programmed trading will soon be subject to real-time monitoring. While authorities expect the measures to increase transparency, increased controls on certain trades have raised concerns that liquidity could tighten and make markets less attractive overall.

“The current trend of regulators to tighten regulation of high frequency trading is somewhat understandable but also worrisome,” said Gary Duggan, chief executive officer of the Global CIO Office. “The activity of HFT funds also brings liquidity to the markets – better liquidity leads to improved efficient asset prices.”

The controversial nature of such restrictions is on full display in South Korea, where a ban on short selling has hurt its efforts to win an upgrade from MSCI Inc. These developments highlight the difficulties policymakers face in following increasingly sophisticated trading strategies and their impact on financial markets, a challenge that is only set to increase with the adoption of artificial intelligence.

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Sanctions, usually introduced when stock markets were under pressure, have succeeded in stemming the bleeding but their long-term impact has been debated due to the growth of computer-assisted trading.

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

China’s clampdown on quant trading came in February when the stock market hit multi-year lows. With additional support for purchases by state funds, shares saw a recovery but have started to fall again since late May.

Thailand’s SET index has fallen nearly 8% this year, turning it into the worst performing country benchmark in the region. The stock exchange said high-frequency traders will need to register before they can place orders. The measures are part of a package of rules to restore peace amid concerns over the impact of illegal short selling, program trading and corporate scams.

“Policymakers in these markets may see volatility as the primary culprit for underperformance,” said Hebe Chen, analyst at IG Markets Ltd. “In smaller markets like Malaysia, where the combination of performance and volatility is more similar to China and Korea, the possibilities of creating their own safety net cannot be ruled out.

Chen added that countries that are more closely aligned with global investors, such as Japan and Singapore, are unlikely to implement such restrictions as they want to align with the “universal rules of the game”.

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As the sanctions are expected to remain in place for now, market observers warn of a chilling effect on business activities and a possible blow to the government’s reputation.

China’s quantitative hedge funds saw their assets decline in the first quarter after the end of 2022, according to estimates from Citic Securities Co.

In South Korea, quant funds are looking elsewhere as the government extended a short-selling ban until the end of March 2025.

“Since it has become impossible to employ various strategies in South Korea, they are saying goodbye to the South Korean market and are instead doing arbitrage deals in Japan and Hong Kong,” said Jung In Yoon, chief executive officer of Fibonacci Asset Management Global Pte. .

To be sure, some have welcomed the restrictions because they can reduce short-term speculative trading. George Molina, head of trading at Templeton Global Investments, said that “the rules need to be adjusted for what are arguably loopholes in the system.”

That was echoed by Wei Li, multi-asset quant solutions portfolio manager at BNP Paribas Asset Management, who said such measures could contribute to a more stable and transparent market environment and ultimately benefit all participants.

Governments in advanced countries, including the US and Europe, have also resorted to temporary restrictions in times of financial stress, such as the ban on short selling of financial stocks in the US in 2008 and various restrictions at the start of the pandemic.

Charu Chanana, strategist at Saxo Markets, said the “ultimate impact” will depend on how well the rules are balanced to protect investors without stifling market efficiency and innovation. “AI may lead to more algorithmic trading that remains vulnerable to sudden and extreme market movements. Regulation in Asia will be slower to respond to AI developments and therefore precautionary measures may remain more stringent.”