Computerized trading firms, which execute transactions in fractions of a second, account for a negligible share of volume on Singapore Exchange’s cash equities market, according to bourse spokeswoman Loh Wei Ling, while they contribute 30 percent of revenue from derivatives. Singapore Exchange will seek to change that once it introduces safeguards, Chief Executive Officer Magnus Bocker said at a briefing this month.
“We will pursue high-frequency trading once we have circuit breakers and other policies in place,” he said. “That will enhance the liquidity and quality of the Singapore market.”
High-frequency traders facilitate the majority of U.S. equity transactions, where computerized firms have ample opportunity to profit from fleeting price discrepancies because transactions take place on more than 50 venues. Singapore isn’t as fragmented, which keeps computer traders away. Credit Suisse Group AG and Tabb Group LLC said the city’s relatively high trading and clearing fees also deter those firms.
Bocker is seeking more business with the daily average value of equity trades down to about S$1.5 billion ($1.2 billion) this year, a 36 percent plunge from 2007, according to data compiled by Bloomberg. Singapore Exchange’s net income was S$336 million for the fiscal year that ended in June, 20 percent lower than fiscal 2007. SGX climbed as much as 0.7 percent today, before closing 0.4 percent lower at S$7.38.
Bocker’s been building the infrastructure and regulatory framework to attract high-speed traders. The bourse rolled out a S$250 million trading platform in August 2011 that can execute transactions in 90 microseconds.
The exchange hasn’t been successful in attracting orders from the fastest traders because of the high cost of trading in the city, according to Credit Suisse and Tabb Group.
“There is a pretty substantial clearing fee in Singapore that will stop many of the largest high-frequency traders,” said Larry Tabb, founder and CEO of New York-based market research firm Tabb Group. “The exchange fabric isn’t fragmented, so that there will never be the kind of high-frequency trading that we see in the U.S. and or Europe in Singapore.”
Fees for trading on the Singapore bourse amount to about 20 basis points, or 0.2 percent of the value of shares traded, according to data compiled by Credit Suisse. That compares with Sydney-based ASX Ltd.’s 15 basis points, the data show.
“If SGX is serious about high-frequency trading, it could change its fee structure to encourage more high-frequency trading,” said Arjan Van Veen, a Hong Kong-based analyst at Credit Suisse.
Australia, Hong Kong and Singapore have considered the extent to which trading strategies that rely on speedy placement of bids and offers should be regulated amid concern that they can be used to manipulate prices. Germany was the first developed market to legislate the practice, and the European Parliament is pushing for tougher rules.
While circuit breakers provide the market a mechanism to take a pause during times of extreme market volatility, allowing high-frequency traders will introduce unfamiliar risks to investors, according to Securities Investors Association of Singapore, the largest investor lobbying group in Asia.
“A knife is good as well as dangerous,” said David Gerald, president of SIAS. “The exchange and manufacturers of products will put out products to improve their bottom line. Investors must know the risks and decide for themselves whether they want to invest or not. There are many products out there which are very risky and investors have to be educated on the risks and they must make an informed decision.”
One of the hallmarks of high-speed trading has already arrived in Singapore. The bourse has about 100 clients that house their trading computers near the exchange’s servers, an arrangement known as co-location, spokeswoman Loh said. That lets them speed up trading by cutting reaction times.
“We have said in the past that high-frequency trading accounts for roughly 30 percent of our derivatives market,” Loh said. “SGX has announced previously that we will enhance market safeguards before opening up the cash equities market for high-frequency trading. These include random opening and closing routines, pre-trade risk controls and circuit breakers.”
Regulators worldwide have evaluated safeguards since the May 2010 plunge known as the flash crash briefly erased about $862 billion from the value of U.S. equities. Exchanges in that country have since implemented a limit-up/limit-down initiative that prevents market makers from quoting shares at prices deemed too far above or below current levels.
SGX will introduce circuit breakers by early next year after a plunge in shares of three commodity companies erased $6.9 billion in market value over three days, the bourse operator said on Oct. 10. Under the proposal, trading of a stock will be halted for five minutes if it moves 10 percent in either direction, the bourse said.
Since becoming CEO in December 2009, Bocker scrapped the midday trading break and introduced dual listings of American Depositary Receipts at SGX to boost profits. Brokerages are turning less bearish on the company, with the number of sell recommendations at the lowest since 2011, according to data compiled by Bloomberg.
Getting high-speed traders to operate in Singapore will improve liquidity and market efficiency, Tabb said.
“The more liquidity and the more trading generally makes the market better, lowers trading cost and helps smaller investors,” Tabb said. “Generally, it doesn’t make the market more risky unless it becomes as complex and fragmented as the U.S. market.”
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