Singapore leads the race to attract algorithmic traders
SGX is the first exchange in Asia to offer sub-millisecond trading access, allowing for hundreds of transactions in the blink of an eye; can Bursa Malaysia keep up by allowing DMA?
The following article first appeared in the June 2008 edition of AsianInvestor magazine. Each month we offer online a feature from the magazine. To subscribe, please send an e-mail to: [email protected].
Investors worldwide have been turning to Asia in search of alpha. Allocations to this region have been increasing exponentially and investors are competing for relatively fewer and less liquid shares compared with the west.
The Singapore Exchange (SGX) is leading the charge in Asia ex-Japan in upgrading its trading execution capabilities to meet the growing needs of investors coming into the region. The SGX is well-aware that time is of the essence, especially to algorithmic traders that are moving into Asia in an attempt to duplicate their success in the US and in Europe. In the race to upgrade trading infrastructure, SingaporeÆs neighbours donÆt even come close.
SGX and Singapore Telecommunications (SingTel) signed a deal in late May to provide traders with ultra-low latency access to SGX securities and derivatives markets. That makes SGX the first exchange in Asia to offer sub-millisecond access to its trading engines. Just how significant is this new service? It takes around 150 milliseconds to blink an eye. So in the blink of an eye, the SGX is now capable of hundreds of transactions in the securities and derivatives market.
The new service, called SGX Proximity Hosting Services, provides SGX members and their customers with access to the exchangeÆs trading engines more than four times faster than the current rate. SGXÆs existing service provides between four to 20 millisecond trading access and is already known to be the fastest in the region. The new service is in response to demand from a growing segment of algorithmic and proprietary traders who are beginning to establish a strong presence in Asia.
ôWe are finding that algorithmic and high-velocity traders who are participating quite heavily in the US and Europe are increasingly looking more to get involved in the Asian market and there are key elements that make it conducive for them to operate here,ö says Rama Pillai, senior executive vice-president and head of intermediaries and market access at SGX.
ôThey want high-speed access or low-latency access for their infrastructure engines. This service that we have launched together with SingTel will allow them to better operate in this space.ö
High velocity
For traders who are yet to make the journey to Asia, this service is expected to help them reach the decision to locate their trading boxes in Singapore to participate in that market and the rest of the region. With this new service, an SGX customer sitting overseas doesnÆt have to relocate to Singapore. The customer can work with the exchangeÆs vendors and with SingTel to house servers in local facilities and trade.
High-velocity traders make up a small portion of SingaporeÆs market compared with the US and Europe. But Pillai believes that this new service and other features that the SGX has put in place recently û such as the reduction of the bid-offer space for securities and the upgrade of its data feed û will significantly improve the marketÆs efficiency.
In December 2007, SGX reduced the minimum bid sizes for securities. It customised the minimum bid structures for Exchange Traded Funds, bonds, debentures, loan stocks, the Hong Kong Dollar and Japanese yen-denominated securities. It also widened the threshold for member firmsÆ forced orders key from +/- 6 bids to +/-10 bids for the main securities products. To an exchange customer or a trader, especially an algorithmic trader participating in the market, the bid/ask spread forms part of the slippage or the cost of trading. Reducing that spread lowers the cost of access or trading.
In February this year, SGX upgraded its market data system, SGX DerivativesQuote, which is the first solution in the world to be powered by OMXÆs next generation distribution system for market data, Genium Market Info. That new system enabled SGX to enhance data dissemination services to market participants, allowing brokers and data vendors to offer more comprehensive data to their customers. Key benefits of the new system include its ability to support 10 levels of bid and ask sizes (compared to three previously), as well as calendar spreads data for all futures contracts on SGX (compared to only for euro/yen futures contract previously).
Muthukrishnan Ramaswami, senior executive vice-president and chief operations officer at SGX, says the new data feed system has strengthened investor confidence through enhanced market data availability and has contributed to increased liquidity. In addition to faster capture and delivery of market data, the upgraded data feed system also covers more timezones and products than the previous system.
Malaysia goes DMA
Although still far behind Singapore in terms of trading execution technology, Malaysia is making strides in its efforts to improve its trading execution capabilities.
Bursa Malaysia introduced direct market access (DMA) for derivatives in April. A new equities trading platform called Bursa Trade Securities is expected to be launched in the second half of 2008.
ôDMA is the fastest way to connect an investor to the market and it will change the trading landscape in Malaysia,ö says Bursa Malaysia chief executive officer DatoÆ Yusli Mohamed Yusoff. ôWith the wider spectrum of trading activities offered, DMA will give investors more control over their trade executions.ö
Having DMA in place improves MalaysiaÆs competitiveness in the area of attracting more global investors, a must if wants to succeed in its bid to become the global hub for Islamic finance. ôThis will certainly widen our reach to a larger pool of local and international investors, DatoÆ Yusli adds.
DMA is a zero-touch electronic trading solution that enables investors to route orders directly to the exchange for immediate execution. It will significantly reduce the time for orders to be sent and matched from a previous average of five seconds per transaction to a fraction of a second. It has the ability to support algorithmic and block trading as well as provides greater access to international investors.
One edge Bursa Malaysia has is its electronic trading platform (ETP) for its bond market, which it introduced in late-April to boost transparency and liquidity.
Malaysia is the worldÆs biggest issuer of sukuks, or Islamic bonds. The growth of the Malaysian sukuk market over the last five years has been particularly impressive, registering an average growth of 33%.
Forty-five per cent of all bonds issued in 2007 were sukuks û with a total value of RM55.5 billion ($17.1 billion) û compared with only 17% or RM17.8 billion ($5.5 billion) of total sukuk bonds issued five years ago.
The new bond platform û which was developed and customised based on the bond trading system of the Korea Exchange (KRX) û allows dealers to easily match bids with offers, negotiate deals, report over-the-counter transactions and access historical data through a common computerised network.
The ETP offers real-time price quotes. The ETP was built in collaboration with Korea ExchangeÆs technology subsidiary Koscom, which assisted Bursa Malaysia with the system development.
Bursa Malaysia has waived the transaction fee for all bond market participants until June 30 to encourage trading on the new platform. ôIt will take time before dealers migrate to the platform as they would need to familiarise and adapt to the new automated trading system,ö says Yusli.
Efforts by the SGX and Bursa Malaysia will certainly attract global players who prefer highly efficient markets where trading is fully electronic.
But the differences in what the two exchanges have to offer underscores the heterogeneous nature of trading execution capabilities in Asia and itÆs unlikely that algorithmic and high-velocity traders will sweep through the entire region any time soon.
For now, they will have to be content with taking advantage of the opportunities in just a few markets.
Investors worldwide have been turning to Asia in search of alpha. Allocations to this region have been increasing exponentially and investors are competing for relatively fewer and less liquid shares compared with the west.
The Singapore Exchange (SGX) is leading the charge in Asia ex-Japan in upgrading its trading execution capabilities to meet the growing needs of investors coming into the region. The SGX is well-aware that time is of the essence, especially to algorithmic traders that are moving into Asia in an attempt to duplicate their success in the US and in Europe. In the race to upgrade trading infrastructure, SingaporeÆs neighbours donÆt even come close.
SGX and Singapore Telecommunications (SingTel) signed a deal in late May to provide traders with ultra-low latency access to SGX securities and derivatives markets. That makes SGX the first exchange in Asia to offer sub-millisecond access to its trading engines. Just how significant is this new service? It takes around 150 milliseconds to blink an eye. So in the blink of an eye, the SGX is now capable of hundreds of transactions in the securities and derivatives market.
The new service, called SGX Proximity Hosting Services, provides SGX members and their customers with access to the exchangeÆs trading engines more than four times faster than the current rate. SGXÆs existing service provides between four to 20 millisecond trading access and is already known to be the fastest in the region. The new service is in response to demand from a growing segment of algorithmic and proprietary traders who are beginning to establish a strong presence in Asia.
ôWe are finding that algorithmic and high-velocity traders who are participating quite heavily in the US and Europe are increasingly looking more to get involved in the Asian market and there are key elements that make it conducive for them to operate here,ö says Rama Pillai, senior executive vice-president and head of intermediaries and market access at SGX.
ôThey want high-speed access or low-latency access for their infrastructure engines. This service that we have launched together with SingTel will allow them to better operate in this space.ö
High velocity
For traders who are yet to make the journey to Asia, this service is expected to help them reach the decision to locate their trading boxes in Singapore to participate in that market and the rest of the region. With this new service, an SGX customer sitting overseas doesnÆt have to relocate to Singapore. The customer can work with the exchangeÆs vendors and with SingTel to house servers in local facilities and trade.
High-velocity traders make up a small portion of SingaporeÆs market compared with the US and Europe. But Pillai believes that this new service and other features that the SGX has put in place recently û such as the reduction of the bid-offer space for securities and the upgrade of its data feed û will significantly improve the marketÆs efficiency.
In December 2007, SGX reduced the minimum bid sizes for securities. It customised the minimum bid structures for Exchange Traded Funds, bonds, debentures, loan stocks, the Hong Kong Dollar and Japanese yen-denominated securities. It also widened the threshold for member firmsÆ forced orders key from +/- 6 bids to +/-10 bids for the main securities products. To an exchange customer or a trader, especially an algorithmic trader participating in the market, the bid/ask spread forms part of the slippage or the cost of trading. Reducing that spread lowers the cost of access or trading.
In February this year, SGX upgraded its market data system, SGX DerivativesQuote, which is the first solution in the world to be powered by OMXÆs next generation distribution system for market data, Genium Market Info. That new system enabled SGX to enhance data dissemination services to market participants, allowing brokers and data vendors to offer more comprehensive data to their customers. Key benefits of the new system include its ability to support 10 levels of bid and ask sizes (compared to three previously), as well as calendar spreads data for all futures contracts on SGX (compared to only for euro/yen futures contract previously).
Muthukrishnan Ramaswami, senior executive vice-president and chief operations officer at SGX, says the new data feed system has strengthened investor confidence through enhanced market data availability and has contributed to increased liquidity. In addition to faster capture and delivery of market data, the upgraded data feed system also covers more timezones and products than the previous system.
Malaysia goes DMA
Although still far behind Singapore in terms of trading execution technology, Malaysia is making strides in its efforts to improve its trading execution capabilities.
Bursa Malaysia introduced direct market access (DMA) for derivatives in April. A new equities trading platform called Bursa Trade Securities is expected to be launched in the second half of 2008.
ôDMA is the fastest way to connect an investor to the market and it will change the trading landscape in Malaysia,ö says Bursa Malaysia chief executive officer DatoÆ Yusli Mohamed Yusoff. ôWith the wider spectrum of trading activities offered, DMA will give investors more control over their trade executions.ö
Having DMA in place improves MalaysiaÆs competitiveness in the area of attracting more global investors, a must if wants to succeed in its bid to become the global hub for Islamic finance. ôThis will certainly widen our reach to a larger pool of local and international investors, DatoÆ Yusli adds.
DMA is a zero-touch electronic trading solution that enables investors to route orders directly to the exchange for immediate execution. It will significantly reduce the time for orders to be sent and matched from a previous average of five seconds per transaction to a fraction of a second. It has the ability to support algorithmic and block trading as well as provides greater access to international investors.
One edge Bursa Malaysia has is its electronic trading platform (ETP) for its bond market, which it introduced in late-April to boost transparency and liquidity.
Malaysia is the worldÆs biggest issuer of sukuks, or Islamic bonds. The growth of the Malaysian sukuk market over the last five years has been particularly impressive, registering an average growth of 33%.
Forty-five per cent of all bonds issued in 2007 were sukuks û with a total value of RM55.5 billion ($17.1 billion) û compared with only 17% or RM17.8 billion ($5.5 billion) of total sukuk bonds issued five years ago.
The new bond platform û which was developed and customised based on the bond trading system of the Korea Exchange (KRX) û allows dealers to easily match bids with offers, negotiate deals, report over-the-counter transactions and access historical data through a common computerised network.
The ETP offers real-time price quotes. The ETP was built in collaboration with Korea ExchangeÆs technology subsidiary Koscom, which assisted Bursa Malaysia with the system development.
Bursa Malaysia has waived the transaction fee for all bond market participants until June 30 to encourage trading on the new platform. ôIt will take time before dealers migrate to the platform as they would need to familiarise and adapt to the new automated trading system,ö says Yusli.
Efforts by the SGX and Bursa Malaysia will certainly attract global players who prefer highly efficient markets where trading is fully electronic.
But the differences in what the two exchanges have to offer underscores the heterogeneous nature of trading execution capabilities in Asia and itÆs unlikely that algorithmic and high-velocity traders will sweep through the entire region any time soon.
For now, they will have to be content with taking advantage of the opportunities in just a few markets.
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