SGX seeks HFT growth with Reach upgrade

The latest part of the S$250 million (US$207.9 million) infrastructure upgrade for the Singapore Exchange came online this week in the shape of the Reach, a new trading engine that SGX claims is the world's fastest.
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The latest part of the S$250 million (US$207.9 million) infrastructure upgrade for the Singapore Exchange (SGX) came online this week in the shape of the Reach, a new trading engine that SGX claims is the world's fastest.

Despite some minor early teething troubles with unstable connections, the system is now up and running smoothly, though whether it will be a game changer for Singapore remains to be seen.

The Reach trading engine offers 10 times more capacity than the previous system and a latency of 90 microseconds. Its launch follows the opening of the SGX Data Centre and co-location services in April, and the elimination of the hour-and-a-half lunch break on 1 August.

Nels Friets, head of securities at SGX, sees Reach stimulating the kind of growth in electronic trading that the exchange has witnessed in derivatives.

“We estimate that high-frequency traders contribute about 30% to the volume of our derivatives market, from marginal levels three years ago. For our securities market (which is where Reach is operating) high-frequency trading (HFT) is marginal and we hope to see participation from these traders and other participants increasing in the months and years ahead.”

“The whole purpose of the upgrade and getting rid of the lunchtime break was to invite more liquidity into the market, including high-frequency traders,” suggests Josephine Kim, head of electronic trading in Singapore for Bank of America Merrill Lynch. “We have yet to see an increase in volumes but are expecting the impact to come over the longer-term rather than immediately.

“It's such great marketing for SGX that Singapore is now number one in terms of speed, but we're not really making use of it yet because the liquidity isn't there,” she added.

New opportunities

But that liquidity may be on its way sooner rather than later, according Steffen Gemuenden, CEO of RTS, a supplier of trading technology, “We're hearing from more of our international trader clients that they would like to trade Singapore – it's become very attractive for them. The new Reach platform has increased capacity and reduced latency, giving the market more potential for growth. Our customers see opportunities for arbitrage between Singapore and other markets.”

He added, “They're doing the right things with the data centre, co-location and more cooperation with other exchanges. And not just on the market, but with the Center for Financial Education – where RTS sponsors the software – that is used to train students, traders, and other market professionals to narrow the gap between click traders and the more sophisticated algorithmic traders.”

Particularly against the background of recent market turmoil, there is some concern from current market participants and the exchange, that an increase in HFT and fragmentation could spike volatility further.

“We have measures in place and are constantly improving these to ensure the market remains orderly at all times. As for fragmentation, our view is that as an exchange, we must try to meet customer needs,” says SGX's Friets. “This is why we partnered Chi-X Global to offer Chi-East, an electronic crossing network for Hong Kong, Japanese and Singaporean securities from November 2010.”

Friets added that the exchange was also introducing measures such as circuit breakers to help maintain an orderly market. SGX has just closed its public consultation on circuit breakers and expects to have them in place by 2012.

In the meantime, participants are getting used to the new ultra high speeds on the market.

“While market depth has remained the same, because people have less time to react there are concerns from dealers that if there are any problems with orders, for example, they could have a significant impact on the market,” suggests BAML's Kim.

However, speed is not the only issue. “SGX could do more to improve efficiency in the market and that would be more appealing to high-frequency traders than just increasing the speed. Singapore is still developing as a HFT centre and lags Japan and Hong Kong,” said Kim, whilst acknowledging it is moving in the right direction. “SGX has a long-term plan that it is executing. Reach and the elimination of the lunchtime break are steps along the way.”

Author: Gavin Blair