Market trading set to become a lot quicker

The Abu Dhabi bourse is looking to introduce algorithmic and high-frequency-trading to increase liquidity.

A revolution on Middle East stock markets is slowly gathering speed as Turkey has become the latest country to activate a system that allows traders to buy and sell in the blink of an eye.
This month the Istanbul Stock Exchange embraced algorithmic trading, also known as "robo-trading", which enables the automatic trading of stocks, bonds and currencies as they cross certain thresholds.
Those strategies enable high-frequency trading in which algorithms trade on data in periods of time too short for a human trader to react.
"This is the new reality," says one trader who is developing such tools for the UAE.
Regulators and traders argue that the liquidity gains inherent in opening up UAE markets to such strategies are worthwhile, even if it means being exposed to such threats as the Flash Crash that hit markets in the US this May (see sidebar).
Algorithmic trading will account for about 35 per cent of all trades in the US next year, according to TABB Group, a consultancy focusing on capital markets.
For now, the practice remains far off for the UAE's stock markets. But regulators in the capital say the Abu Dhabi Securities Exchange (ADX) is planning initiatives that could see algorithmic trading, as well as high-frequency trading, adopted.
The challenge is primarily technological, says Elie Michel Ghanem, the head of market and product development for the ADX.
"We've got to have the infrastructure which would allow high-frequency traders to have their quotes displayed in a nano-second," Mr Ghanem says.
Measures to attract high-frequency traders include server upgrades and building data centres near stock exchanges to minimise time lag between placing and executing trades.
Mr Ghanem says increasing institutional investors' participation in local markets will also draw high-frequency trading strategies to the region. That includes allowing remote access to local markets by "selective and credible institutions" operating overseas, he says.
"Hopefully, within a year we'll be on the radar of the big traders, which we appreciate and would like to happen on our market," Mr Ghanem says.
But traders say there are major hurdles in implementing algorithmic or high-frequency strategies in the UAE.
Saad al Chalabi, an institutional investor at AlRamz Securities who has developed automated trading programs in anticipation of their entrance to UAE markets, says current levels of commissions on trades prohibit high-frequency trading from taking off, as there could be thousands of trades every second.
"High-frequency trading would destroy profit potential because of the cost of trading," Mr al Chalabi says.
He adds that lack of liquidity in UAE bourses and the lack of market-makers are also a prohibiting factor, but algorithmic trading could allow markets to correct themselves more quickly in the event of a rout.
Although institutional investors tout the advantages of high-frequency trading, the UAE's retail investors, who account for about three quarters of all market activity, may be less optimistic.
"The presence of high-frequency traders tends to increase transaction costs for retail investors by a little bit," says Thomas Peterffy, the chief executive of the US online company Interactive Brokers.
Algorithmic trading can allow "front-running" of a stock being traded by a retail investor, in which a faster rival bids up a security in the short period of time before a trade is executed, pushing up the cost of investing.
Some retail investors may have cause to feel the odds are now stacked against them. On western markets, the increase of high-frequency trading has coincided with a sharp fall in retail investor participation. Investors have withdrawn US$71.4 billion (Dh262.25bn) from equity mutual funds in the US since May, data from the Investment Company Institute shows.
Mr Ghanem says there is no desire to reduce the numbers of UAE retail investors, who have "proven themselves to be essential in the marketplace".
However, Mr al Chalabi said the adoption of high-frequency and algorithmic trading will demand retail investors become "more sophisticated", a change that would happen over time.
"A lot of people will step in and other people will step out, and they'll change their skills and they'll learn."
[e-mail]