TWSE eyes algos, sec lending in foreign investor push

The Taiwan Stock Exchange (TWSE) is considering introducing algorithmic trading and wants to see more securities borrowing and lending, in a drive to attract international investors and boost liquidity. 

Meanwhile, talk of a trading link with China appears to have subsided, although the Taiwan bourse has inked such an agreement with Singapore Exchange this year.

Taiwan does not yet host any algo trading, whereby orders are placed by computers according to set rules. While the required technology is in place, further steps must be taken, such as introducing continuous trading for all securities (it is currently only available for warrants).  

TWSE does not have a timetable in mind for introducing algo trading but is open to the idea, said Huang Naikuan, TWSE’s senior executive vice president and chief information officer. 

The exchange would have hesitated to permit algo trading 10 years ago, he noted, but is now more comfortable with the concept given the mechanisms available to prevent stock-market disruption by such strategies. Algo trading has been blamed for causing market havoc; the US ‘flash crash’ in May 2010 has been cited as an example of the potential problems it can cause.

Taiwan would probably follow US and European practice by curbing excessive order-to-trade ratios by imposing cost-control measures, said Huang. That is, when the ratio exceeds a certain level, brokerage firms will be charged extra fees. The aim is to tackle the fact that algos can contribute a high number of buy and sell that do not translate into trades. Such measures would help prevent events such as the flash crash, he noted.

Moreover, the exchange has upgraded its infrastructure in recent years, including launching a new data centre this year with sufficient capacity to support algo trading.

Meanwhile, TWSE is keen to see more securities borrowing and lending (SBL), despite some concerns in Taiwan about short-selling. Contrary to conventional wisdom, such activity does not create more volatility, Huang said.

SBL volumes amount to a small fraction of TWSE's total $879 billion market capitalisation (as of end-June 2015), and the key to boosting them will be attracting more foreign investors. They account for 92% of Taiwan’s SBL market, which had an outstanding balance of NT$432 billion ($13 billion) as of April 8. About 60% of the stocks borrowed are used for shorting. 

Currently, foreign investors hold about 40% of Taiwan’s stock-market cap and account for about 30% of trading volume, said Huang. 

“We hope to increase the diversity of foreign investors,” he added. “Most of them only use long-only strategies, and very few do long/short or high-frequency trading.” 

For one thing, TWSE hopes that all institutional investors will in future be allowed to participate in SBL, although the permitted range is already fairly wide.

To facilitate the development of the SBL market, the exchange relaxed some of the rules in early February, allowing brokers to borrow securities directly from customers, removing borrowing limits, expanding the range of securities eligible for SBL and extending the rollover limit.

Another recent move that should help boost liquidity in Taiwanese stocks is the March 22 move by Liquidnet, an institutional equities-trading platform, to introduce trading of Taiwan-listed securities. This is the firm's 12th market in Asia Pacific.

Meanwhile, TWSE is looking to facilitate access to overseas markets in response to demand from domestic investors. In the past three years there has been a net flow of NT$1 trillion to $2 trillion into foreign investment products, according to Taiwan’s central bank.

Taiwan asset managers listed the first exchange-traded funds providing exposure to developed-market equities in mid-2015. And local investors are expected to be able to buy Singapore-listed securities via local Taiwanese brokers by mid-2016, following the agreement TWSE signed with Singapore Exchange in January. 

However, the establishment of a trading link with China similar to Hong Kong’s does not appear to have progressed as a concept.

“As for the link with China, it would be good if it can happen,” said Huang. “But thanks to the Hong Kong-Shanghai Stock Connect scheme, Taiwanese investors can enjoy access to Shanghai via Hong Kong.”

In any case, Beijing has been somewhat preoccupied in the past year with a stock-market crash and approval of funds under the new mutual recognition scheme, among other things. Opening up a further link is unlikely to have been an urgent priority.

There were early-stage talks about a Taiwan-Hong Kong Connect a few years ago, but these did not go further, likely because it is already easy for Taiwanese investors to buy Hong Kong shares and vice versa.