Hong Kong Exchanges & Clearing Ltd. will spend HK$3 billion ($386 million) on technology upgrades over three years to boost trading speeds and expand its derivatives business amid increased competition from regional exchanges, the bourse operator announced today.
The world’s largest bourse by market value is calling the technology initiative, which will also offer connections to mainland Chinese markets, Orion, after the constellation also known as the hunter. ABN Amro Bank’s clearing unit and Credit Suisse Group AG’s foreign-exchange unit are among 22 founding tenants of a new co-location center, which will allow traders to put their servers in the same place as the bourse’s for faster access.
After $32 billion in exchange mergers globally have failed in the past year, exchanges are turning to technology and new product offerings to remain competitive both in their own markets and globally. Hong Kong is focusing on connectivity and product mix instead of speed for development because a local transaction tax discourages high-frequency trading.
“The exchanges are responding to the increased competition in the global capital marketplace,” Joseph Sarcona, head of electronic trading for Asia-Pacific at Morgan Stanley in Hong Kong, said in a telephone interview. “The Hong Kong exchange may not have local competitive pressures, but by modernizing their infrastructure they want to do their part in maintaining Hong Kong’s status as Asia’s international financial hub.”
Other exchange companies in the region are seeking ways to compete. Tokyo Stock Exchange Group Inc., which announced in November a bid to merge with its smaller Osaka rival, unveiled its Arrowhead trading platform in 2010 that can process a trade in 2 milliseconds.
Singapore Exchange Ltd., whose bid for Australia’s main bourse operator was blocked by Canberra lawmakers last year, has the even faster Reach, a system that can process transactions in 90 microseconds, making it the fastest in the world. A microsecond is one millionth of a second and a thousandth of a millisecond.
“If you are complacent, if you think no one else is going to take your market share, if you think no one else will break into your market, you will be at the mercy of history,” Charles Li, Hong Kong Exchanges chief executive officer, told reporters yesterday in Hong Kong. The bourse chose the name Orion because it is one of the brightest star groupings, visible from almost anywhere on the planet. “We wanted to be like the hunter, stay hungry, stay ahead.”
Most other exchanges have set up faster trading platforms and co-location centers to cater to high-frequency trading, which uses algorithms to analyze markets and execute orders quickly and in high volumes.
Hong Kong has focused on connectivity to other markets and ease of trading for smaller brokers as its status as a statutory monopoly prevents local competition within the special administrative region. The city’s stamp duty, which charges per transaction, prices high-speed strategies out of the market as they need to buy and sell high volumes in a short amounts of time.
In the data center, exchange officials have been courting data and technology vendors, clearing companies, foreign-exchange platforms and telecommunications providers so that any trader firm coming in can use its own systems, or use those already in place.
Ryan Wuebbels, head of relationship management at the exchange, said the bourse’s Tseung Kwan O Industrial Estate data center has reached a “critical mass” with the 22 firms that have reserved space in the data center. It will house companies with the technology to execute every level of the trade life cycle from data dissemination to clearing and settlement.