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Foreigners lead high frequency trading

Concerns rise over greater volatility generated by high frequency trading in Korea

Foreign investors dominate high frequency trading in the Korean stock market, data showed on Monday, a practice regulators say fuels volatility.

According to the report by the Korea Capital Market Institute, which tracked trading patterns of KOSPI 200 futures and options products that matured in December 2010, foreign investors made up 75.6 percent of high frequency traders in the local options market and 98 percent in the futures market. They typically placed orders more than 20,000 times a day, scoring profits thanks to their new trading solutions outsmarting local investors.

The data showed that foreign investors ran some 17,000 accounts that placed more than 1,000 orders a day, while the figure for individual investors was about 2,300.

In the futures market, individual investors often engage in frequent trading, but in the area of high frequency trading, they are outnumbered by foreign investors by a wide margin.

In high frequency trading, investors utilize market data and high-powered computers to take profits. Fast decision making and excellent access to the market information are required.

In the U.S., about 50-60 percent of trading volume is estimated to come from such high frequency traders, reflecting the broader preference for such trading techniques at a time when the global financial market is seeing little growth due to the ongoing eurozone sovereign debt crisis.

But Korean regulators view such trading as spawning problems such as higher volatility and system instability caused by extremely frequent orders in the network.

“High frequency trading and volatility tend to go together as more investors jump into such fast trading to capitalize on greater market volatility,” said an official from the KCMI. “The upward trend of high frequency trading will not change unless the regulatory system in question gets overhauled.”

Foreign investors’ key area for extremely fast trading is derivatives. But Korean brokerages are reluctant to join the fray as they lack the sophisticated trading techniques and hardware infrastructure.

Given that high frequency trading is still in its infancy among Korean investors, regulators seem unlikely to take steps to introduce any new policies in the near future, but if volatility of the market increases, their stance is expected to change.

By Yang Sung-jin (