The Stock Exchange of Thailand is preparing to use a "circuit breaker" for highly traded stocks to ease the impact of volatility on retail investors.
President Charamporn Jotikasthira said the regulator has met with securities firms to seek a solution for extreme volatility now that investors can trade through its high-frequency trading (HFT) system.
HFT is an advanced trading platform capable of processing a large number of orders at very fast speeds, contributing to high volatility in the market.
The obvious advantage of the system is speed, as trading orders are processed in seconds.
But when the market is highly volatile, automatic ordering can be detrimental, and a tool is needed to prevent this.
Most stocks trading through HFT are large-cap stocks with a high liquidity, mostly listed on the SET50.
Mr Charamporn said after the SET studied other developed bourses, it found most set a frame of price movements for each stock they want to control.
Some set a gap of 5% or 10% for price movements, with a circuit breaker halting trade for two minutes once it reaches that critical level.
"This method is interesting. We are in discussions with brokers to hear their feedback and see how we could adapt it to for use here," said Mr Charamporn.
Since the SET launched HFT late last year, the number of total investors that place orders through SET-registered brokers to trade via HFT has gradually increased to about 10% of total trading value.
Neither brokers not registered with the SET nor institutional investors can place orders on HFT directly.
"We're concerned we may face the same situation as the 'flash crash' that happened with the Dow Jones Index when it fell by more than 1,000 points in a few minutes in May 2010 due to the rapid speed of HFT. We have to be very cautious about this," he said.
After the SET finds a measure to deal with the side effects of HFT, he believes the contribution of total transactions for the index from institutional investors can rise to 26% from 20% currently through use of HFT.
The HFT system at the Thai bourse processes trading orders about six times faster than HFT services on Japan's bourse, said Mr Charamporn. "If everything goes as planned, HFT will boost market trading significantly," he said.
The SET has prepared a major overhaul of its trading system for next year to expand its coverage to all types of assets and other major currencies. The move is aimed at preventing a flash crash with any kind of asset trading through the Thai bourse.