SGX liquidity ambitions yet to be realised

UBS's David Rabinowitz says the Singapore Exchange's hopes of adding liquidity and reducing volatility through the introduction of all-day trading and the world’s fastest trading engine have yet to be realised.
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In line with the pan-Asian trend towards eliminating or shortening lunchtime breaks on the region’s exchanges, the Singapore Exchange (SGX) began all-day trading on 1 August. With the introduction of the world’s fastest trading engine occurring the same the month, the exchange was hoping to attract new liquidity, reduce volatility, narrow spreads and lower trading costs. But not all of those objectives have yet been achieved, according to David Rabinowitz, head of Direct Execution technology for Asia-Pacific at UBS.

Despite opposition from many traders about the ending of the 12.30-2pm break, which some claimed they needed to meet clients face-to-face, SGX went ahead with the change, already delayed from its originally proposed 1 March deadline. SGX chief executive Magnus Bocker had stated that it could boost trading volumes by up to 10%, but that is yet to materialise. Indeed, when presenting SGX’s Q1 2012 results, Bocker cautioned that the impact would be gradual. While jittery global markets have witnessed falling volumes as investors have pulled back from equities, it appears to be not only macro factors that have prevented the hoped-for volume increases.

“What’s happened in Singapore is similar to what we’ve seen in Hong Kong, which is not a huge difference in volumes before and after the ending of the lunch hour. We don’t believe an extension of the trading day is necessarily correlated to turnover,” asserts Rabinowitz.

“What actually happens is there’s a shift in where pockets of liquidity reside. The former lunchtime break represents about 8.5 to 9% of the daily trading volume, and what’s been seen is that liquidity is being taken from other sessions – so open auction volume has dropped off about 30%, close auction volume about the same amount and overall the afternoon volume is down about 10%,” explains Rabinowitz.

September trade data for SGX shows the open trade volume running at about 3.3%, one of the lowest monthly levels this year. The extended trading day appears to be simply stretching volumes across the whole session rather than increasing them.

As for all-day trading lowering costs, Rabinowitz sees potentially different outcomes for the sell-side and the buy-side.

“Extended trading hours does not necessarily imply a reduction in trading costs for the broker – trading for longer periods has the potential to generate more orders which would result in increased transaction costs,” he notes.

“With respect to costs incurred by the market participant themselves, we have seen volatility narrow to its lowest level over the lunch hour session, while, in fact, spreads remained relatively stable. On an average basis, this would in turn result in a reduction in transaction costs for the client,” points out Rabinowitz.

What else SGX could do to increase volumes? “They need to remove their married trade thresholds for crossing. That’s become a hindrance to crossing of stocks on the exchange.” Orders may only be crossed off exchange above 50,000 shares or S$150,000 if reported to SGX within 10 minutes of execution. UBS extended its PIN crossing network to Singapore earlier this month.

But Rabinowitz does believe that the exchange is on the right track, having “done a lot of in terms of co-location and order routing”.

Despite the mixed results and often for unrelated reasons, other exchanges across the region, including the Hong Kong Exchanges and Clearing, Tokyo Stock Exchange and the Philippine Stock Exchange are all set to shorten or eliminate midday downtime.

This is part of what Rabinowitz calls, “a definite move towards 24 hour trading”.

“It is ironic that brokers are complaining about the end of the lunch hours when in the future they may be trading at 11 or 12 o’clock at night.”

Author: Gavin Blair