Algos, Latency Force Asia Upgrades

According to Neil Katkov, research manager at Celent in Tokyo, latency at many Asian exchanges is still measured in seconds, compared to millisecond standards in the US and Europe-with some Asian exchanges 100 times slower than their Western counterparts.

However, Katkov says this is changing, and that mergers among exchanges are driving demand for better services. "The standards in the US and Europe will be in demand here... so [latency] is becoming an issue for Asian exchanges," he says.

Growth of algorithmic trading is also putting pressure on exchanges. Though algo trading in Asia still lags behind the US and Europe, its usage has grown exponentially over the last two years, industry participants say. According to Brook Teeter, director of Advanced Execution Services at Credit Suisse in Hong Kong, flow and trades being executed from algorithmic trading, including direct market access, grew from two percent of trading to upward of 30 percent (IMD, July 2).

In fact, officials at the Tokyo Stock Exchange, which increased the capacity of its market data system by 10 percent in November from 30,000 to 33,000 messages per minute as part of a more comprehensive systems overhaul set to be completed in 2009, said the new systems were being implemented specifically "in response to the increasing demand in terms of speed of order executions due to the rapid growth of financial technologies such as algo trading." (IMD, Dec. 3).

The Singapore Exchange is also testing a new data platform for its derivatives feed, which is based on the Genium data platform from Swedish exchange operator and technology provider OMX and should be fully implemented in January. Exchange sources say the new platform should deliver a 10-fold latency improvement over SGX's current internally developed data platform, and should allow the exchange to increase trading volumes by between 200 and 300 percent (IMD, Oct. 29).

Further north in the region, Hong Kong Exchanges and Clearing was also retiring a legacy technology platform-its 20-year-old Realtime Digital Data Service-in favor of a new platform dubbed Market Data Feed, as part of a project to improve electronic disclosure of information (IMD, Aug. 20).

However, emerging market exchanges are involved in similar improvement projects as their larger rivals in the region. For example, the Stock Exchange of Thailand is investing $1.5 million to move to a new equities and bond trading engine by the start of 2008, and to upgrade network connectivity in 2009 in a bid to halve message latency from the current 50 milliseconds.

And as these markets open up to investors worldwide, Asian exchanges are responding with proximity hosting solutions to reduce latency to other parts of the world. For example, in the summer, SGX launched a proximity hosting service with network provider BT Radianz that allows trading firms to locate high-frequency trading applications in BT's Singapore data center (IMD, June 25). The exchange is also working with network providers Savvis and Transaction Network Services to provide access to its direct feeds.

But while Asian exchanges lag their Western counterparts, some are attempting to leapfrog their local rivals by allying with other, more technologically advanced exchanges-such as those between the Tokyo Stock Exchange and NYSE Euronext or the London Stock Exchange-which Celent's Katkov says is a chance for Asian exchanges to learn from international exchanges' best practices.

Of course, the alliances could also be part of Western exchanges' merger and acquisition plans for the high-growth Asian markets, following a spate of exchange consolidation in the US and Europe (see story, page 13).