China’s Biggest Exchange Amps Up Trading Technology Systems

  • Exchange’s speed still modest compared to world’s fastest
  • Improvements seen focusing on stock market stability

China’s biggest stock market by volume has introduced technology upgrades that bring it closer in line with its international counterparts.

The Shenzhen Stock Exchange now has an order-matching engine with a response time of 1.1 milliseconds, one-hundredth of the previous system, while order processing capacity was tripled to 300,000 trades a second. Accompanying the upgrade is a new data center equipped with 5,000 server cabinets for co-location, allowing brokers to place their servers in the same spot as the exchange’s machines.

The changes reflect the rapid development of China’s equity markets, which were only officially established in 1990. As stock trading around the world moves to being wholly computerized, faster systems are essential, though Shenzhen’s revamp still leaves it well behind its U.S. counterparts. The measures nevertheless help the bourse, especially as it readies for the stock link with Hong Kong.

“It makes sense for Shenzhen to upgrade its systems regularly because its volume is growing rapidly,” said Castor Pang, a Hong Kong-based analyst with Core-Pacific Yamaichi. “Exchanges around the world all update their systems regularly to lower maintenance costs.”

Shenzhen’s market is the biggest in China by trading volume, with average daily turnover of about $50 billion this year. It is preparing for a link with the stock exchange in Hong Kong, which Chinese leaders have said will start in 2016. Having an updated system would help Shenzhen narrow the technological gap with Hong Kong and ensure the link functions more smoothly.

The bourse also expanded the capacity of its professional market data feed, from six to 10 megabytes a second. The data feed contains both real-time market information and price snapshots that refresh every three seconds, it said in an e-mail. The upgrades were introduced last month.

Slower Than HFT

Shenzhen isn’t the only Asian market embracing speed. Japan’s Osaka Exchange Inc. on Tuesday introduced a trading system that sped up the time it takes to process orders to about 100 microseconds from 2 milliseconds, and dramatically increased the number of orders that can be processed at any one time.

To read a QuickTake about the importance of speed in modern markets, click here.

Unlike Japan, where high-frequency trading is an established and substantial part of the market, China’s authorities frown on super-fast trading. While brokers use algorithms to buy and sell stocks, HFT is effectively absent from the stock market.

Many HFT firms have a response time of less than 1 microsecond, one thousandth of the time of the Shenzhen exchange’s upgraded platform, said David Snowdon, chief technology officer at Metamako, which sells financial network technology. The fastest firms have managed to push the response to around 200 nanoseconds, he added. A nanosecond is one thousandth of a microsecond.

China’s relationship with algorithmic trading is in flux. The China Securities Regulatory Commission in October released draft rules proposing that traders using automated orders must report certain information and wait for a review before they’re allowed to execute their strategies. Industry feedback was that the proposals were too stringent, said Natasha Xie, a Shanghai-based partner with Jun He Law Offices. Local media reported in May that the rule was put on hold. The CSRC hasn’t commented on the status of the plan.

Modest Upgrades

Shenzhen’s upgrades are modest compared to the world’s fastest exchanges. In the U.S., both Nasdaq Inc. and Bats Global Markets Inc. have venues with response times below 100 microseconds, around ten times faster than Shenzhen, Raymond Russell, CTO at Corvil, a data analytics company, said in an e-mail.

While the upgrades make Shenzhen’s exchange faster, unlike many of its international peers, the bourse isn’t necessarily trying to lure more customers, said Liang Tao, Shanghai-based strategy consultant at MagicQuant, which makes automated trading software platforms.

“In China, exchanges put market stability before commissions because they are government-owned and money is not their top concern,” said Liang.

— With assistance by Gary Gao

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