SGX mulls over rebates for high-frequency market makers

[SINGAPORE] Singapore Exchange (SGX) could consider rebates for high-frequency market makers to boost liquidity in the marketplace, a senior executive of the bourse operator told The Business Times yesterday.

"We are interested to see how we can support liquidity and market-making in our securities markets as market makers and liquidity providers provide a service to the market," said Chew Sutat, executive vice-president for sales and clients at SGX.

"Clearly for that service and the cost and risk that they are taking in providing two-way quotes, they will need to be compensated through appropriate schemes, including potentially liquidity rebates as an example."

These comments come as SGX begins to lay some of the key pieces that would allow it to make a bigger push for high-frequency trading (HFT). The exchange plans to put in place circuit breakers in 2014, and has invested heavily in low-latency technology.

Mr Chew said SGX was unlikely to go as far as a maker-taker system, a controversial model where liquidity providers are paid for posting both buy and sell offers, while traders that "take" those offers are charged a fee.

However, fee rebates or liquidity provisions are possibilities that SGX could offer to entice high-frequency traders to make markets for Singapore-listed stocks once the regulatory and infrastructural support is in place, Mr Chew said.

Such a possibility has to be considered partly because Singapore is a single-exchange market. In more fragmented and deeper markets such as the United States, high-frequency traders can make money by arbitraging price differences between exchanges or correlations within markets.

In Singapore, those opportunities exist mainly in the derivatives market, where about 30 per cent of volumes are already attributed to high-frequency players. With derivatives contracts, traders can exploit inefficiencies through parallel products that trade elsewhere in the world, for example.

On the securities side, high-frequency market-makers also exist for many of the exchange-traded funds and warrants, where issuers have a clear incentive to maintain liquidity. But it is in the listed stocks where high-frequency market-makers may need more enticement.

"There are investors already running some algorithm models profitably, such as trading correlations intra sector - for example trading the three banks against one another - or across index components in different sectors, but we would welcome more," Mr Chew said.

Ken Ang, an analyst at Phillip Securities, reckoned that the exchange might also consider lowering the maximum daily clearing fees or reducing clearing charges if traded volumes exceed a certain threshold.

But he noted that SGX has adopted a multi-pronged strategy to attract high-frequency traders.

Minimum board lot sizes could eventually be lowered to one share, and market diversity and depth are constantly in focus.

"What they are doing is constantly trying to improve the attractiveness of stocks on the exchange . . . Including more sector diversity, more overseas exposure," Mr Ang said.

But UOB Kay Hian analyst Jonathan Koh felt that SGX was already competitively priced against many other exchanges.

"The cost differential may not be that significant between us and the US. In terms of cost, it's probably not a serious issue that can derail the transformation from happening," he said.

SGX's Mr Chew agreed, noting that clearing fees were only a component of total trading costs. In terms of total costs, Singapore falls somewhere in the "lower middle" of the pack when factors such as taxes and market-impact costs are considered, he said.

"Also, the cost of trading is not the only reason for different types and levels of HFT activity in any exchange," he said.

A Hong Kong-based high-frequency trader, who declined to be named, said Singapore's pricing was competitive with Hong Kong, which imposes stamp duties on securities trades.

The Republic is "a small venue but it's a good venue. What matters is the computer systems are very quick, and that's the main thing for us", the trader said.

SGX would benefit from the boost in liquidity should high-frequency traders become more prominent, said Carmen Lee, head of investment research at OCBC.

"This will help with the liquidity in the market, as market players are able to quickly participate in market opportunities, leading to more efficient flow of information to share prices," she said. "There will also be risks associated with it, but measures must be in place to help mitigate these risks, including SGX's plan to introduce circuit breakers."

Some critics of SGX's plan to woo high-frequency traders argue that doing so would prejudice retail investors.

"Regulators of much bigger exchanges and practitioners of HFT, such as the stock exchanges in European Union and the United States, have recognised the unfair advantages accorded to its users at the expense of the rest," Jimmy Ho, president of the Singapore Society of Remisiers, wrote in a letter.

"Hence, these regulators are now contemplating restraining HFT to restore a level playing field in the markets."