TRADING in Singapore's US$517-billion-a-day foreign exchange (FX) market is about to get even faster, cheaper and a whole lot more efficient.
The Monetary Authority of Singapore (MAS) is looking into developing an ecosystem of pricing and matching engines here, which entails improving the execution in the institutional FX market for Singapore-based buy-side players, and allowing sell-side banks to price more competitively.
The end-game: Making Singapore's FX market more future-ready.
MAS assistant managing director (Development and International) Leong Sing Chiong told The Business Times: "The opportunity here is for us to work with different key platforms and FX liquidity providers to set up an e-trading ecosystem in Singapore.
"This is so that FX transactions, especially in Asian currencies originating in Asian time zones are matched in Singapore instead of being routed to overseas markets, thereby suffering from latency and poorer execution."
The Bank for International Settlements (BIS) found in its triennial survey that global trading in FX markets averaged US$6.5 trillion a day on a net-gross basis in April 2016.
Singapore is the world's third largest FX hub after London and New York, and the largest in Asia.
However, the city-state captured barely 8 per cent of the global FX turnover, compared to the top two markets: UK at 37 per cent of global FX trading volume, and US at 20 per cent. And rival Hong Kong is nipping at Singapore's heels, averaging US$437 billion a day.
Heng Koon How, United Overseas Bank's head of Markets Strategy, Global Economics and Markets Research, said: "Clearly, there is room for Singapore to grow this to a more meaningful volume."
The demand for a real-time, accurate and reliable electronic FX pricing engine, a comprehensive FX trading solution for financial institutions, is increasing, especially with rapid growth in the electronification of the FX market.
Mr Leong said the initiative goes beyond having engines located here.
"Over the next few years, if we are able to bring in the technology and infrastructure to serve the region's FX trading needs, it will improve liquidity, execution and transparency in the FX marketplace in the Asian time zone. This initiative will also make Singapore's financial sector more future-ready as electronification continues to transform the FX sector in Asia."
This involves attracting inter-dealer platforms, multi-dealer platforms and liquidity providers to base their matching and pricing engines here, especially since most of the banks already base their regional FX traders in Singapore - and Singapore is a major hub for buy-side players such as asset managers, corporate treasury centres.
Currently, while Singapore is home to 12.5 per cent of global FX players, transaction flows from Singapore go to Tokyo, New York and London, where buyers and sellers are matched.
Stephen Innes, who heads trading in the Asia-Pacific at Oanda, said: "Having local servers to execute regional currency transactions and even G-10 transactions would allow us to shave transaction cost time. This would allow us to transact quicker and perhaps receive better executions."
Sending an order to Tokyo, the nearest trading centre, takes about 60 milliseconds; it takes another 60 milliseconds for the reply to get back. This can go up to 200 milliseconds if the order is directed to London or New York, which means a total time of 400 milliseconds.
Wong Joo Seng, founder and chief executive of Spark Systems, a startup with an ambition to create a FX marketplace in Singapore, said the total time could stretch to 700 milliseconds, depending on the line quality. During volatile periods such as the US presidential election, Brexit or terror bomb scares, rejection rates can soar.
Incumbent systems come with high transaction costs. Typically, about 40 cents of every dollar earned goes into paying the market operator. This means that, for firms with trading volumes in excess of several trillion dollars per year, total transaction costs can be US$6 million to US$7 million per trillion transacted.
Hence, having a Singapore-based exchange to process orders much more rapidly and cheaply will eradicate such risks.
But it seems easier said than done.
Mr Innes at Oanda said: "The costs in the past were quite prohibitive to establish regional servers."
There is also a chicken-and-egg problem of who to match with if you are the first to set up the matching engine here, Mr Wong added.
But this is poised to change. With cloud technology coming to the fore, this is now possible at a lower price tag - and Spark aims to be one such game changer with its new generation of "ultra-fast, low-latency, resilient and cost-effective" platform, which charges a fifth of the industry average.
At the end of the day, it boils down to execution cost savings versus cost of co-locations, Mr Innes said.
"Its all about speed and location. The speed of data transfer is the key, and whatever advantage you can save in time amounts to money saved (in theory).
"But the groundwork has begun, and I think this is the wave of the future, when all major exchange hubs will have their own matching engine especially if the co-location costs come down."