By expanding its membership and product offerings, SGX is strengthening its position as a one-stop-shop for Asian trading, clearing and settlement.

An integral part of Singapore’s financial centre, the Singapore Exchange’s (SGX) strategy is to be the Asian Gateway for its customers. This is a two-pronged strategy. First, SGX offers a choice platform for companies from the region to raise international capital. Second, it also offers a multitude of Asian products for international investors to participate in the region’s growth.

Given that strategy, SGX understands the need to implement systems and trading practices that comply with global standards and have been tested in larger international markets. Most important, the platform must allow all types of participants to access the market. To this end, SGX uses a number of NASDAQ OMX solutions to help provide its business with a competitive edge.

Continuing that partnership, both organizations signed a Migration Study Agreement to undertake a detailed study of a migration plan to GENIUM Trading, NASDAQ OMX’s next generation trading platform. “Migration would result in SGX having ultra low latency and world leading performance, supporting our initiatives to attract more high velocity and algorithmic traders,” says Muthukrishnan Ramaswami, Senior Executive Vice President and Chief Operations Officer at SGX.

“This agreement is the latest in SGX’s roadmap to continually enhance our technology to enable our business. Our plans for growth include continuing to develop new products and services and expanding our membership. We also seek to develop close working relationships with other like-minded exchanges and partners to capitalize on complementary opportunities in our respective markets,” says Bob Caisley, Executive Vice President & Chief Information Officer at SGX.

As indicated, SGX offers a choice platform for companies from the region to raise international capital. Today, more than 40 percent of SGX’s listed companies represent more than 20 countries outside of Singapore. SGX also offers investors international exposure. For example, its suite of real estate investment trusts (REITs) provides opportunities for investors to participate in Indian, Chinese, Japanese and South East Asian high yielding property investments.

Beyond primary listings, SGX offers a growing number of Asian products to enable international and local investors to participate in the region’s growth. These products include structured products like REITs; business trusts; infrastructure funds and structured warrants; and market access products, including Exchange Traded Funds (ETFs) and participation certificates.

“Currently, about half of SGX’s income is derived from our external products,” says Caisley. “Clearly, our Asian Gateway strategy has been successful.”

In these times, market participants have also shown a preference for on-exchange trading and clearing to ensure transparency. SGX plans to meet this need by increasing the number of OTC products it clears. “The demand for central counterparty clearing of OTC derivatives will increase; something we think we will expand into as we go forward,” says Ramaswami.

SGX first ventured into OTC clearing when it set up AsiaClear®, Asia’s first such service for oil swaps and forward freight agreements (FFAs), in 2006. SGX AsiaClear provides clearing for 22 OTC products covering dry bulk and wet tanker FFAs and oil and aromatics swaps.

Ramaswami says, “We continue to enhance our infrastructure to achieve our goal of building an enduring marketplace. A key objective is to attract algorithmic traders. To entice these traders, we are enhancing market microstructure and customer support with a series of algo-friendly features and services. We have reduced equity tick sizes and spreads, for instance, and introduced proximity hosting services.”

“We are launching new order types, facilitating co-location, and introducing direct market access (DMA) and high speed trading access. We are also improving our infrastructure to decrease latency and increase throughput, and we have put systems in place to disseminate real-time market data in new ways and are supplying customers with historical data for back testing purposes,” adds Caisley.

Executing transactions and complying with regulations are challenges for investors in some Asian markets; Singapore is comparatively user-friendly. By trading through a single gateway, investors avoid incurring the overhead of establishing operations in multiple countries.

“At the end of the day, the ability to attract different customers and market participants to an exchange is not just about innovating domestically. It’s also about innovating and being relevant to a range of international participants. In the region, SGX is unique in being able to offer a one-stop gateway to Asia,” says Ramaswami. 

Technology as an enabler

SGX originally used licensed software from another vendor for derivatives trading and in-house systems for equities trading and
market data. But the exchange realized it could not accomplish its goals without upgrading its technology and services. SGX leveraged NASDAQ OMX’s knowledge base and technology solutions to implement its Asian Gateway strategy.

“We decided to move away from our in-house trading and market data dissemination system because we were hitting hard limits within the system and other capacity constraints,” explains Caisley. “We needed to raise the bar on the speed, capacity, scalability and robustness of our IT infrastructure to provide our clients with a competitive advantage.”

SGX replaced the licensed derivatives trading engine and the in-house equities trading system with an integrated platform from NASDAQ OMX, then introduced a new market data dissemination system, also from NASDAQ OMX.

SGX enhanced its service offering by adding capabilities quickly and reducing time to market for new products. It now supports almost all existing multiple order types and market models across all asset classes, which was not previously feasible.

“With our internal system, we had to develop every single new function ourselves, which took a significant monetary and time investment,” says Caisley. “The fact that we can leverage existing functionality in our solutions is a huge advantage.”

Technology improvements have continued. At the end of 2008, SGX upgraded its derivatives engine, Quest-DT, to a newer, faster and less expensive platform with added capacity and the ability to better meet increased demand from algorithmic and high velocity traders. The upgrade supports new options trading strategies and is an essential prerequisite to the launch of SGX’s new derivatives clearing system, SGXClear - also powered by NASDAQ OMX and planned for the end of 2009.

Together with SGX’s Proximity Hosting Service, this increased trading  functionality will enable the exchange to better meet customer demands and to continue to build on its Asian Gateway strategy to provide a one-stop, pan-Asian equity derivatives product suite.

SGX launched its Proximity Hosting Service in May 2008 to provide traders with ultra low latency access to its equities and derivatives markets, making it the first exchange in Asia to offer sub-millisecond access to its trading engines.

“Our technology is now on par with derivatives trading platforms in the US and in some parts of Europe,” says Ramaswami. “This certainly gives our members a sense of comfort when trading in this region.”

Technology has been key to growth. “SGX tripled its trading volume and launched a host of new products since going live on the new trading engine,” adds Robert Fröjd, General Manager – South East Asia & Pacific at NASDAQ OMX. “This has had a positive effect on the exchange’s revenues.”

 BY SHERREE DECOVNY PHOTO NORMAN NG