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Buckle Up For High Frequency Trading

Singapore exchange logoCharlie Munger described it as being “basically evil”. In fact he went as far as saying that it was akin to allowing a bunch of rats into a granary.

Warren Buffett was more measured. He said it doesn’t make a difference if you own stocks long term. He added that while real-time quotes are good, people have made them a bad thing by being swayed by what the market tells them at any moment.

Welcome to the controversial world of High Frequency Trading that looks set to make its entrance on the Singapore market. The Singapore Exchange (SGX: S63) is reportedly considering rebates for high frequency market makers to boost liquidity.

Whether you agree with Munger or Buffett, High Frequency Trading, which are trades executed in millionth of a second, are undoubtedly divisive.

On the one hand it creates liquidity, which is welcome in any market. It could also make stock prices more reflective of information available in the market place. In the long run, it could even bring down transaction charges as the cost of running an exchange is borne by those who trade more frequently.

However, the downside is that it could introduce unwanted volatility. It could also cause unwanted spikes and mini crashes, which are obviously undesirable if they should happen at the exact moment that you plan to either buy or sell shares.

That said Buffett is right. As investors we should focus on the long-term prospects of the companies we invest in. Consequently, if a business does well, the stock price should eventually follow, regardless of what might happen in the short term.

As investors, we should continue to focus on the long-term economics of the companies we like. Remember, we should be investing in good companies quoted on the stock market. We should not be buying and selling tickers just because they happen to be on the stock market.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.