Algorithmic trading on the SGX: less clarity, more volatility
I'm never one to say things have to stay the same when new technology comes along. Resisting change is generally futile. That's particularly the case if new revenue streams can be earnt. But the Singapore Exchange's announcement of a partnership with SingTel to cut the processing time of trades to less than a millisecond from the current, oh-so-slow 4 milliseconds deserves further investigation. As always, whenever the exchange makes changes, there are winners and losers. In this case it appears the exchange is the winner, traders might be winners if they play their cards right, and investors are losers.
The point of the cut in the time it takes to consummate a trade from miniscule to even more miniscule is to allow traders to employ algorithmic programs. It's also called automated trading or program trading. It's when computers take over the job of brokers. There are some excellent articles around on this subject, such as this one from BusinessWeek a few years ago. The area of automated trading is an industry unto itself. There is even a magazine and a podcast on the subject.
Suffice to say, algorithmic trading will create:
1. Greater secrecy. It'll be harder to find out who's moving large positions because this will be done incrementally, and
2. Greater volatility. A third of all EU and US stock trades in 2006 were driven by automatic programs, according to this article on Wikipedia. That is, driven not by fundamentals but by technical trading.
It'll "enhance SGX's market liquidity and depth" alright. But I can't see how either of them will be good for investors. Recall, investors are those poor souls who buy stocks for what they're actually for: Dividend payouts and capital appreciation. There is already enough noise around to distract us from this. The last thing we need is to be tossed around by ever growing storms of volatility, and a decreased understanding of who is buying or selling what.
As I said, I am loath to critique new technology on the basis of resistance to change. It just means that investors will have to keep getting smarter. And not just investors. As Futures & Options Week points out, the increase in automated trading "presents a challenge to clearing operations" because lightning fast trades require lightning fast clearing. Let's hope the SGX is also geared up for that.
Mark Laudi, who fears the Singapore Exchange will become evermore Singapore's third casino.
To comment on this blog, go to the Investor Central blog.
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ArchivesThe point of the cut in the time it takes to consummate a trade from miniscule to even more miniscule is to allow traders to employ algorithmic programs. It's also called automated trading or program trading. It's when computers take over the job of brokers. There are some excellent articles around on this subject, such as this one from BusinessWeek a few years ago. The area of automated trading is an industry unto itself. There is even a magazine and a podcast on the subject.
Suffice to say, algorithmic trading will create:
1. Greater secrecy. It'll be harder to find out who's moving large positions because this will be done incrementally, and
2. Greater volatility. A third of all EU and US stock trades in 2006 were driven by automatic programs, according to this article on Wikipedia. That is, driven not by fundamentals but by technical trading.
It'll "enhance SGX's market liquidity and depth" alright. But I can't see how either of them will be good for investors. Recall, investors are those poor souls who buy stocks for what they're actually for: Dividend payouts and capital appreciation. There is already enough noise around to distract us from this. The last thing we need is to be tossed around by ever growing storms of volatility, and a decreased understanding of who is buying or selling what.
As I said, I am loath to critique new technology on the basis of resistance to change. It just means that investors will have to keep getting smarter. And not just investors. As Futures & Options Week points out, the increase in automated trading "presents a challenge to clearing operations" because lightning fast trades require lightning fast clearing. Let's hope the SGX is also geared up for that.
Mark Laudi, who fears the Singapore Exchange will become evermore Singapore's third casino.
To comment on this blog, go to the Investor Central blog.
Visit the brand new Investor Central website! for FREE SMS alerts to news about stocks in your watchlist.
Labels: algorithmic trading, automated trading, program trading, Proximity Hosting Services, SGX, Singapore Exchange, SingTel
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