High-Speed Traders Abandon Microwaves in Korea on Exchange Snubby
Bourse says high-speed technology may violate market fairness
HFTs could take advantage of time gap on derivatives venue
South Korea’s exchange is renewing its push to rid the country of a technology used by high-speed trading firms in the world’s biggest stock markets, arguing that it’s unfair.
Korea Exchange asked brokers in July to disclose whether they’re using microwave networks, said Ko Young Tae, a KRX official in charge of derivatives policy. While Ko suspects the practice has stopped in the wake of an official bourse notice to avoid the technology last year, the exchange is surveying the market to know for certain, he said.
Microwaves are the fastest way for traders to send orders to exchanges. While the technology has faced criticism around the world, the Korean exchange’s opposition is unusual for a national venue where the practice is legal. The bourse is focused on creating a more level playing field, despite high-speed trading proponents who say faster markets are more efficient.
“There is a possibility that the system violates fairness in markets,” Ko said in a phone interview.
A primary reason for traders to use microwaves in Korea is the relocation of the exchange’s derivatives venue to the city of Busan 248 miles away from Seoul, the country’s financial and political capital. The move was part of a government plan to develop the southern coastal city into a financial hub, said Nam Gil Nam, a research fellow at Korea Capital Market Institute.
The relocation created a gap of fractions of a second between the two cities for market data and orders, Nam said, a difference that the fastest traders could in theory use to their advantage. Korean lawmakers have yet to establish detailed guidelines for high-frequency trading, in part because major markets around the world are still grappling with how to best regulate the practice, he said.
“While there’s no clear guidance globally on this kind of trading, it’s hard for Korea to set a clear stance now,” Nam said by phone.
One issue may be that smaller local brokerages didn’t use microwave networks, according to market participants.
“Most of the traders who used the microwaves were at foreign firms,” Smith Kim, a partner of Seoul-based trading consulting group IUM, said by phone.
Some local brokers lack the power to compete with microwave technology as domestic trading commissions have come under pressure. Korea’s derivatives market, the world’s biggest by volume in 2011, shrunk by more than 80 percent as the government tightened curbs on individual investors.
“We can’t afford such high tech by ourselves,” said Kim Jin Woo, a Korean options trader at Hyundai Futures Corp. in Seoul.