Regulators in Canada, the U.S., and Europe are facing the question of whether to reign in high-frequency trading, amid accusations that it's dangerous for markets. But Singapore has gone in the opposite direction: it's trying to entice more high-frequency traders.
Singapore Exchange Ltd. (SGX), Southeast Asia's largest bourse, is seeking high-speed traders as a way to mitigate its struggles with low trading volume. "We will pursue high-frequency trading once we have circuit-breakers and other policies in place. That will enhance the liquidity and quality of the Singapore market," announced SGX CEO Magnus Bocker in a briefing this month.
Right now, high-frequency trading accounts for a "negligible share" of volume on SGX's cash equity market, and 30 per cent in derivatives, bourse spokeswomen Loh Wei Ling told Bloomberg. The average daily value of equity trade on SGX is about 1.5-billion Singapore dollars ($1.27-billion). This is 36 per cent lower than 2007, according to Bloomberg data.
High-frequency trading relies on computers, rather than humans, to trade stocks, commodities and other securities in microseconds, based on often-minute price discrepancies. One reason that Singapore hasn't been able to lure high-frequency traders is that its market is not as fragmented as that of the U.S. equity market. It's harder for HFT firms to make profits on price differences when there is only one exchange, compared to the U.S. where there could be as many as 50 venues for trading a given security.
Is high-frequency trading the remedy for Singapore? The debate rages on about whether high-frequency trading is a menace or angel for markets. Some academics commend HFT for its benefits to transaction costs for all investors. On the other hand, catastrophes such as the 2010 flash crash, in which the Dow Jones Industrial Average dropped over 1,000 points in minutes, are undeniably alarming.
"This is an interesting example of a market operator wanting more HFT to help improve the quality of the markets it hosts," says Jim Overdahl, former chief economist at the Commodity Futures Trading Commission in the U.S. "If you look at the academic literature on HFT, market quality metrics have improved across the board as markets have become more automated and competitive, so this desire is not surprising."
Singapore's hunger for HFT is especially interesting because the Ontario Securities Commission is currently deciding whether to approve a new Canadian exchange whose goal is to ostracize certain "predatory HFT strategies," at the expense of offering best prices to end-users. Mr. Overdahl alludes to potential problems with regulation: "Some restrictions, while technically possible, may end up raising the costs to end-users in a substantial way."
SGX is confronting the question of regulation before it opens its cash equity market to high-frequency trading. On Oct. 10, SGX announced it will introduce circuit breakers by early next year. These circuit breakers will halt trading of a stock if it moves 10 per cent in either direction. According to Ms. Ling, SGX also plans to implement other safeguards, including random opening and closing routines, and pre-trade risk controls.