Singapore Exchange will be introducing pre-trade risk controls for buy-side firms and high-frequency traders that use its derivatives market by the third quarter of 2011.
Buy-side clients and proprietary trading firms currently connect their trading systems to the risk management systems of SGX's clearing members for pre-trade risk checks. With SGX's pre-trade risk controls, customers will be able to connect their order management systems directly to the exchange's trading engine.
The system offers a two-gate check, which initially ensures that a maximum order size is adhered to, and secondly that trading size limits, one for buy and one for sell, are not exceeded. Margins for limits are set by the sell-side firm depending on the contract traded.
Dominic Lim, head of market access at SGX, says the system is fairly basic but does offer a number of advantages to users.
Firstly connecting via a sell-side firm gives the broker a level of exclusive control over its client's risk controls. If the clients have valuable proprietary trading systems, they may not want to allow this level of access. By connecting directly to the exchange, they can bypass this challenge, with the broker setting the limit at the exchange level.
The system also reduces ties to the clearing member, which allows fund managers to switch between clearing members more easily. By linking directly to the exchange engine the solution also reduces the number of ”hops' made during the trading process, reducing latency.
Gan Seow Ann, president of SGX said, “As we embrace high speed trading and new technology to meet diverse needs of our global trading community, this initiative will strengthen our marketplace by enhancing the capability of our members and their customers to manage risk exposure more effectively. It will further promote direct access to the SGX trading platform, thereby widening our market reach and distribution.”
SGX claims to be the first exchange in Asia to offer such a service to the trading community. It has plans to introduce similar controls for the equities market in 2012, following a planned upgrade to its trading system in August 2011.
On 25 October 2010 SGX entered merger talks with the Australian Securities Exchange. On 24 January 2011 the pair announced long-term financing for the combined entity had been secured, with S$3.8 billion and A$750 million to be made available by Australia and New Zealand Banking Group, The Bank of Tokyo- Mitsubishi UFJ, Singapore Branch, DBS Bank, Oversea-Chinese Banking Corporation, United Overseas Bank and National Australia Bank. Australia and New Zealand Banking Group has been appointed as the coordinator in relation to these term loans.