Enhancing Singapore's ecosystem for FX

AS a veteran trader of assets including foreign exchange and precious metals options, entrepreneur Wong Joo Seng is intimately familiar with the "pain points" around forex that have long dogged investors - and not just the FX trading community.

His entrepreneurial arc - starting with his stint as the founding chief executive of GK Goh Financial Services in 1998, to his co-founding of M-DAQ in 2010 and his latest brainchild Spark Systems - has centred around the thorny predicament of FX trading where costs until recently have been unreasonably, even astronomically, high.

M-DAQ seeks to facilitate cross-border transactions for industries, taking on the tagline "World without Currency Borders".

Spark Systems, a sophisticated AI-empowered FX trading platform, is targeted at professional traders, institutions and hedge funds. It sets out to dramatically shave the costs and time taken to complete an FX transaction in Singapore. Its ambition is to firmly plant Singapore onto the global FX trading map.

Non-FX traders may wonder at this. Singapore, after all, is already among the top three FX trading centres, according to a ranking by the Bank of International Settlements in 2019. Singapore made third place with an average daily FX volume of US$640 billion. While that is larger than Hong Kong's US$632 billion, it is far behind the top two locations - UK with US$3.57 trillion and the US' US$1.37 trillion.

What isn't obvious is that until recently, the matching and pricing of FX trades are typically routed to offshore centres such as London, Japan and New York. The re-routing process jacks up the costs and time lag - or industry parlance, latency.

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THE challenge was to persuade institutions to establish data centres here for FX pricing and matching, which would significantly enhance Singapore's ecosystem for FX. What was needed was more than a user-friendly and speedy platform. The industry also needed an advocate to galvanise major institutions to take up the gauntlet and commit to establishing such data systems in Singapore.

Enter the catalysts: Mr Wong and his AI-enabled platform Spark Systems; and timely grants from the Monetary Authority of Singapore for institutions which take the plunge.

Mr Wong recalls: "If we could build FX matching capabilities, we could get the 360 milliseconds needed to complete a trade, down to one millisecond. It's a quantum leap, literally the speed of light. This was raised with the MAS (Monetary Authority of Singapore) and they were totally on top of it.

"To me, the problem was two-fold. The banks already have a centre in Asia, which is Japan, and it costs them to set up another centre. Why would they do it if there was no impetus to do anything differently? Two, there was no first-mover advantage. You could put up a proposal and arrange for the capex. If you set up a centre in Singapore, who would you trade with? No one if you were the first. No one wanted to move. To break this status quo we needed to get a bunch of banks here at the same time."

"My problem was not that MAS didn't understand, but that the banks were sceptical as to what MAS would pay for." He arranged meetings between MAS and the banks, which got the ball rolling.

As it turned out, all it needed was the first two institutions to give the go-ahead. The last six months have seen a "flurry" of activity. To date, the ecosystem now includes major players such as UBS, Citi, Standard Chartered Bank and more recently, Goldman Sachs.

In line with the sharp reduction in lag times, FX platform costs via Spark Systems are also sharply reduced from an estimated US$6-8 per US$1 million worth of trades down to US$2.

"Singapore has now officially become a major FX matching centre. It's great, because for all the things that we try to do to make Singapore a premier financial centre, without the matching centres here, you can't hit a price if markets are extremely fast.

"If you have a Brexit moment or a US presidential election, the ability for a large hedge fund here to unload their position because they feel that market sentiment has turned was iffy. The failure rate can be as high as 20 per cent. But now we can hit a price faster than anyone else can."

Spark Systems' investors are clearly optimistic. So far, the firm raised US$22 million in its Series A round of funding. The Series B round of funding has taken place in stages. The last phase is expected to be completed in February which should take its post-money value to around US$73 million. The company also earlier received a grant from MAS.

Series B investors include Citi and HSBC as well as OSK Ventures. They join the existing investor base which includes Vickers Venture Partners, Dymon Asia Ventures, Dymon Asia Capital, Jubilee Capital, FengHe and Goldman Sachs.

"We have a trading platform built for traders by traders,'' says Mr Wong.

HIGH platform costs have always been a bugbear for him, dating back to when he established GK Goh Financial Services. Even at that time, he chafed at the costs. "As a user at GK Goh, I paid S$12 million for FX transactions but I was already sure that S$3-4 million was the top of what I should be paying, that the factor was wrong to a magnitude of two or three times. I knew what the actual costs should be.

"Platforms don't take any risk. If you put money with a fund manager, he needs to generate alpha. But the platform doesn't trade or manage money. It doesn't worry about high volatility and low liquidity events. It's a toll - you show up at the platform and get charged for using the service. But they still charge such a high rate for not taking any risk which I feel is not appropriate. The banks have seen eroding profit margins. They don't have to pay that much to platforms for execution. We're all aligned on that.

"We need next-generation, really inexpensive, stable, high-speed platforms for FX execution. It's part of what will keep Singapore in the running as a top financial centre."

MR Wong expects the capital raisedto be sufficient to fund Spark Systems' runway for around three years; it expects to break even in around two years.

In addition to products for hedge funds, banks and brokerages, Spark's AI algorithm is able to take in liquidity conditions and optimise execution for clients. There is also a smart transaction cost analysis to enable clients to parse trades for efficiency.

For now, however, he worries about competition for talent. Since the onset of Covid-19, Singapore has rolled out measures to encourage employers to hire mid-career and senior Singaporeans, in an effort to stem job losses.

While his preference is to hire Singaporeans, he believes hiring should be based on getting the best people for the respective roles. "I feel there is a tension on hiring Singaporeans vs foreign workers. Talent is non-negotiable ... If you don't have the right people on board and you can't get the best people for the roles that the company needs, you endanger the entire firm and risk it becoming second rate and uncompetitive.''