Thai stock exchange under SEC review for high-frequency trading programs’ suitability

The Stock Exchange of Thailand (SET) has been requested by the Securities and Exchange Commission (SEC) to carry out a comprehensive review of the use of trading programs, including high-frequency trading (HFT). This initiative has been launched to assess the current trading volumes and their suitability for the Thai stock market.

SEC’s secretary-general, Pornanong Budsaratragoon, revealed in a Bangkok Post interview that certain investors voiced concerns regarding the potential linkage of these programs, including HFT, to short-selling or naked shorting orders.

Pornanong has urged the SET to provide the findings from a study on trading programs, which presently account for 35-36% of the total trading value. It is worth noting that HFT alone represents 10%-15% of the trading value.

The volume generated via trading programs on the SET has seen a significant rise from the previous years. However, it still lags behind other regional exchanges and developed Western markets, Pornanong stated.

“We must not compare the levels with other markets as each market has distinct business conditions and underlying factors.”

Pornanong emphasised the need to determine the most suitable rate for the Thai stock market. She also stressed that market regulators should seek to ensure fairness for all investor groups and securities companies, which operate under varying business models.

Evidence suggests that HFT can be beneficial for derivative warrants (DWs), a product type issued by securities companies. Typically, a DW possesses an underlying single stock listed on the SET’s main board. The price movement of the DW aligns with the direction of the underlying share.

The issuer of a DW has to designate a market maker who can determine the most suitable price or assign another broker to regulate the price to match the price of the stock listed on the main board.

Most market makers prefer to manage DW risk by using trading programs or conducting arbitrage using HFT. In this context, HFT can play a crucial role in enhancing DW prices’ efficiency.

Pornanong noted that a considerable number of Thai investors prefer trading DWs, estimated to constitute around 5% of the total market value.

She concluded by stating that fair management of DW pricing would prevent any group of investors from gaining undue advantage, thus fostering steady industry growth in the long run.