Stock Exchange of Thailand prepares for higher algo volumes

The Stock Exchange of Thailand has drawn up a shortlist of vendors to supply a new trading engine that is expected boost capacity of the exchange by 100 times when implementation is completed in two years.
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The Stock Exchange of Thailand (SET) has drawn up a shortlist of vendors to supply a new trading engine that is expected boost capacity of the exchange by 100 times when implementation is completed in two years.

The SET is expected to make its final decision of a vendor by the end of this month. “The trading engine that we are going to choose is going to be world class, on a par with those used in Singapore, London or New York. With the current system, we can handle five to 10 times more capacity, but the new system is going to increase our potential by 100 times,” said Pakorn Peetathawatchai, the exchange's chief marketing officer.

Currently, algorithmic trading volumes are low as a percentage of overall trading activity on the Thai stock exchange. Research consultancy Celent estimates that algorithmic trading has risen from 0.9% in 2009 to around 3%.

The SET's investor base is made up mostly of onshore retail investors (60%), with the remainder consisting foreign institutional investors (20%), local institutional investors (10%) and the proprietary trading desks of local institutional investors (10%). Peetathawatchai noted that the exchange is keen to encourage high-frequency trading, algorithmic trading and program trading via the offshore market, which means institutional investors' share of the Thai market should grow over time.

In a related move designed increase its attractiveness to foreign investor, the SET is holding discussions with market participants and the Thai Securities and Exchange Commission aimed at improving the efficiency of trading processes for non-voting depository receipts (NVDRs). NVDRs were introduced last November as alternative investment vehicle for international investors that are prevented by directly acquiring stakes in Thai firms by foreign ownership limits.

According to Anshuman Jaswal, senior analyst, capital markets at Celent, the main barrier to the growth of the Thai market is the limited number of participants. “Only seven brokerages are using algo trading at present and there is also a shortage of trained personnel. However, the regulator has certainly indicated its intention to promote algo trading and hence we expect it to produce guidelines to promote related aspects such as co-location,” he said. “But the caveat remains that the lower volumes and depth in the Thai market means that algo trading might take some time to develop and the existence of just one leading platform would render smart order routing ineffective.”

In common with a number of other exchanges, SET is looking to deepen liquidity in its equities market through the development of a wider range of derivatives. SET's Thailand Futures Exchange will add 16 new single stock futures on 21 March based on names from the SET50 Index. In addition, the exchange is seeking to lower the minimum tick size of stock futures to 0.01 baht from 0.10, “to better accommodate the minimum prices of underlying stocks” and to move in line with the practices of other international futures markets.

A recent initiative to equip local players with the required skills is the Algorithmic Trading Workshop & Competition that SET will conduct jointly with the faculty of commerce and accountancy, Chulalongkorn University on 19-20 March.

The SET also intends to review its rules and regulations with the intention of introducing rule-based criteria for algorithmic trading in common with existing guidelines in more mature markets. At the moment, investors who want to do algorithmic trading have to get approval from the SET. Peetathawatchai added, “When our new system is online, we plan to introduce a rule-based system in which investors don't have to ask for approval. Brokers would have to submit all the rules that they use to screen instructions that they get from their customers, and we would enforce them the way that other developed markets that use the rule-based criteria do. But our system cannot utilise the rule-based criteria yet, so we have to use the algorithmic trading approval strategy at the moment.”

A further element of SET's strategy for increasing electronic order flow is the provision of incentives to encourage investors to use the DMA capabilities of local brokers. “We have a promotion for offshore and onshore investors who want to use DMA access through their local broker. We are granting them one DMA channel for free for the first year. Next year if they are able to meet the level of commitment, we would grant them another year of free access,” said Peetathawatchai.