SGX presses on with Reach after ASX setback

The Singapore Exchange (SGX) launched a new data centre and co-location facility on April 11 as part of its S$250 million Reach project, and remains on track to launch the remaining phases of the initiative, including the world's fastest equities trading engine, despite the collapse of its proposed merger with the Australian Securities Exchange (ASX) last week.
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The Singapore Exchange (SGX) launched a new data centre and co-location facility on April 11 as part of its S$250 million Reach project, and remains on track to launch the remaining phases of the initiative, including the world's fastest equities trading engine, despite the collapse of its proposed merger with the Australian Securities Exchange (ASX) last week.

The new data centre houses SGX's trading, market data and clearing infrastructure and offers a range of co-location facilities, including ultra-low latency trading and market data. Co-location customers can start sending orders from April 18. SGX's new trading engine, scheduled for launch in the coming months, will be able to process one million orders in one second per partition.

“Our reach technology initiative reinforces our position as the Asian gateway,” said Tinku Gupta, SGX's senior vice president and head of market data and access. “We are the most international Asian exchange and we want connectivity to come from various parts of the world. We are harnessing technology to stay ahead of the curve, hence our investments in world’s fastest trading engine, our co-location service and setting up of trading hubs around the world.”

The final phase of Reach involves establishing points-of-presence in various global financial centres, such as London, Tokyo and New York, offering direct market access to SGX.

The success of the project in facilitating organic growth in SGX's revenue streams is seen as even more important to the exchange's fortunes after Australian treasurer Wayne Swan rejected the proposed SGX-ASX merger, worth US$8.4 billion, on grounds of Australian national interest.

“The SGX/ASX deal is an M&A strategy which is separate from our co-location service. Our co-location service is designed to meet the needs of our customers. To grow the customer base, we adhere to their demands for co-location,” said Dominic Lim, vice president and head of market access.

The new data centre is part of an exchange-wide technology refresh; with SGX's technology being upgraded and customers demanding co-location services, requirements on its existing facilities intensified. “The first thing we needed to do was to move our equipment to a new data centre which has more connectivity options and power,” Lim said.

High-frequency traders are SGX's main targets as co-location customers, although other customer segments may also benefit from remote hands on-site support, and having their equipment hosted in a safe and secure environment, he added. The co-location offers two tiers of service. The first tier with the lowest latency is for high-frequency traders, and the second tier is for general market participants, which could include brokers, vendors and some funds.

The collapse of the proposed SGX/ASX merger deal has left SGX turning to other sources of growth, including alliances with other exchanges, to reinforce its position as the Asian gateway as well as to support its investments in Reach. One initiative that SGX is expected to refocus its efforts on is the proposed ASEAN trading link, expected to launch at the end of the year. On April 8, seven exchanges located in member countries of the Association of Southeast Asian Nations formalised their collaboration with the launch of the ASEAN Brand Identity, ASEAN Exchanges website and ASEAN Stars, 30 most dynamic stocks from each exchange ranked in terms of market capitalisation and liquidity. The ASEAN Exchanges website features the ASEAN Stars and other ASEAN-centric products and initiatives designed to give investors an integrated single-window view into a region a combined market capitalisation of approximately US$1.8 trillion and participation of more than 3,000 listed companies.

Apart from SGX, the ASEAN Exchanges collaboration members are Bursa Malaysia, Hanoi Stock Exchange, Hochiminh Stock Exchange, Indonesia Stock Exchange, The Philippine Stock Exchange, and The Stock Exchange of Thailand.

Given how the demise of the SGX/ASX merger, any consolidation of exchanges in the region will now be a “very difficult process,” according to Toby Lawson, head of futures and options and cash equities execution, Asia Pacific at broker Newedge Financial Hong Kong. “Singapore needs to get bigger to compete with Hong Kong in developing capital markets and listings on the exchange and the ASX would have been a really good pick up for them,” he said.

Clare Rowsell, ITG's head of client relationship management and marketing for Asia-Pacific, suggested that organic growth may not be sufficient for the SGX to compete with Hong Kong following the latter's recent success in attracting IPOs. “Singapore may need to look for non-organic growth,” she said. “The Singapore market is in itself small so SGX's strategy appears to be to look at many asset classes, improve its technology and systems and look at partnerships. Given the size of the Singapore market, SGX is looking to diversify its business model in a number of different ways and achieve non-organic growth through acquisitions. SGX clearly wants to grow beyond its domestic borders.”

In Lawson's view, the ASX has also reached a critical juncture in its growth model, as the termination of the agreement with SGX means it is now left on its own to tackle competition in its own market. The exchange will face domestic competition for the first time when alternative trading system Chi-X Australia launches in Q4 2011.

“The ASX needs to become more relevant in the region and hopefully the takeover attempt by SGX will be a wake-up call that more needs to be done to build Australia’s competitiveness. The Australian government is saying that it is blocking the deal because it wants to continue to promote Australia as a capital markets hub in the region. However, there is not a lot of action in taking on Singapore and Hong Kong in terms of government policy initiatives.”

And ITG's Rowsell notes that Chi-X Australia is not the only source of competition for the ASX.

“The ASX has traditionally had dominance in the resources sector but we've seen some of the resources IPOs go up to Hong Kong recently,” she observed. “

Despite the Australian government's rejection of the SGX/ASX merger, Robert Laible, global co-head of electronic trading and APAC head of program trading sales at Nomura, believes exchange combinations will continue to be on the agenda. “Asia is only now emerging into a competitive arena for varying sources of liquidity,” he said. “The fact that exchanges in the US and Europe are consolidating – and countries no longer view them as strictly nationalistic institutions – reinforces the view that this is a logical next step in their life-cycle. However, I am quite certain that every exchange board in Asia has met and discussed potential partners. Once the game of musical chairs starts, no one wants to be left standing when the music stops. The ASX/SGX proposal may not have been the shot that was heard around the world, but it most certainly was in Asia.”

Author: Jill Wong