The power struggle between trading desks using cutting-edge technology to gain advantages over their competitors and worldwide regulatory authorities has been joined today by an actual executing venue, which intends to invoke dynamic circuit breakers to its securities market by February 24.
The Singapore Exchange (SGX), a prominent venue which is situated within Asia’s largest institutional FX center, today made a regulatory announcement stating that it intends to install the circuit breakers in order to act in situations where the order flow at the exchange reaches what SGX considers to be “runaway prices” by allowing a pause for investors to take stock of the situation, reflecting a similar methodology to that considered by EBS last year.
Although EBS is an ECN rather than a fixed venue, the ideology which supported its initiative to replace its ‘first in first out’ execution parameters with a method that aggregates orders and randomizes the executions follows a similar path to that proposed by SGX, the purpose of EBS’s move being to place limits on high-frequency traders as their orders will no longer be executed solely based on speed.
SGX expects that its proposed circuit breakers will provide an additional safeguard against potential market disorderliness in times of high price volatility. This move will enhance the robustness of the securities market and increase confidence among market participants, an interesting move in a region previously unburdened by interference from regulators and government officials with regard to the means by which order flow can be processed.
A consultation paper which details the entire functionality and intended purpose of the circuit breakers has been published by SGX, however some of the proposed circuit breakers have specific characteristics, insofar as that they apply to component stocks in the Straits Times Index (“STI”) and the MSCI Singapore Free Index (“SiMSCI”), ETFs based on these indices, and Extended Settlement Contracts on these counters.
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Circuit breakers are intended to operate during the continuous trading hours i.e. from 9.00 a.m. to 5.00 p.m, and will not operate during the opening and closing routines. Trading can occur within a price band of 10% from the reference price, and if there is an incoming order that would result in a trade outside of the price band, the incoming order will be rejected and a cooling-off period of five minutes begins.
Trading can continue within the price band. After the cooling-off period, a new price band is established with the reference price as either the upper or lower limit price of the previous price band which was exceeded.
Although this particular initiative has been brought into being by a venue rather than a regulator, it is clear that the corporate decision to invoke circuit breakers to one of Asia’s most prominent exchanges could well alter the landscape of the entire order flow in a region which is synonymous with advanced technology and experienced high-frequency traders.
The glimmer of hope which shines through this is that no jurisdiction in the entire Asia-Pacific region has yet decided to follow Europe’s somewhat Orwellian lead and bear down on high-frequency trading at government level or the use of algorithms by institutional trading desks, indeed quite the opposite being the case with Australia welcoming dark liquidity and beginning to attract key market participants to establish their operations there.
With success in emerging markets such as Indonesia, it will be interesting to note whether the stratospheric volumes achieved by SGX within its MCSI Indonesian division will continue post-implementation.