Singapore’s e-FX strategy blossoms as Apac competition heats up

Singapore’s strategy to become the premier electronic foreign exchange trading ecosystem in the Asia-Pacific is bearing fruit as an increasing number of major players invest and establish FX infrastructure locally.

JP Morgan, the largest FX bank by turnover, was the latest to announce – at the end of August – that it will set up a matching engine in the country. Meanwhile, Euronext FX (formerly known as FastMatch) is officially launching its own today (September 23) and is the first electronic communications network to do so.

In line with Euronext's matching engines in London, New York, and Tokyo, the one in Singapore will focus on spot FX, but the firm may consider expanding this to other products, such as non-deliverable forwards. 

The chief executive officer of Euronext FX, Kevin Wolf, says that when the platform announced its intention to go ahead with a matching engine in April, there were already good signs of growth in liquidity provision in Singapore. Since that announcement a few liquidity providers have made it known they will also invest in e-FX infrastructure in Singapore.

“We’re very committed and focused on growing in Singapore with the rest of the ecosystem that will be developing around us,” he says. “Singapore is going to grow, especially as an e-FX centre, and FX liquidity providers are going to need a robust platform like Euronext FX. This is not Singapore coming out of nowhere to develop an electronic FX ecosystem – it’s already coming from a place of strength as the third-largest FX centre globally.”

This is not Singapore coming out of nowhere to develop an electronic FX ecosystem – it’s already coming from a place of strength as the third-largest FX centre globally

Kevin Wolf, Euronext FX

Since MAS outlined its push in late 2017 to encourage key FX players to anchor their matching and pricing engines in the country, more than half a dozen major players have announced their intention to do so. 

“JP Morgan is one of these marquee names that have looked at our ecosystem, and seen the potential to anchor their investments here and grow the FX market,” Benny Chey, an assistant managing director at the Monetary Authority of Singapore (MAS), tells FX Week.

Once JP Morgan's engine is live in the first quarter of 2020, the US bank says its clients will experience reduced latency in trade execution and greater price transparency.

While the regulator does not have a hard target, Chey says a dozen market participants setting up their pricing engine in Singapore by 2020 would be considered a solid base.

“We are well on track to achieving this ambition with a significant number of banks, non-banks and platform players having built, or committed to building, pricing and matching engines in Singapore over the next six to 12 months,” says Chey.

JP Morgan joins other top-tier banks such as Citi, Standard Chartered and UBS, which have strengthened their presence in Singapore, as well as non-bank market-makers XTX and Jump Trading, and trading platforms Euronext FX and LMAX.

UBS has confirmed its matching engine is currently up and running.

More than wishful thinking

The central motive for attracting e-FX infrastructure to Singapore is that large buy- and sell-side market participants based there continue to rely on pricing and matching engines in London, New York or Tokyo. MAS is concerned that during bouts of high volatility and market events, these players remain exposed to heightened trade rejections and poor trade execution, because of latency factors associated with interacting with distant trading centres.

When MAS deputy managing director Jacqueline Loh outlined Singapore’s ambitions to become the premier FX e-trading ecosystem in the region at the FX Week Asia conference in 2018, she said the regulator not only encourages key FX players and platforms to anchor their e-trading facilities, matching and pricing engines in Singapore, but it is actively working with them to make this happen.

As such, MAS provides funds to first-movers who commit to setting up their pricing and matching engines in the country, provided they meet relevant eligibility criteria.

“The grant is perhaps helpful at the margin in shifting or accelerating the decision, and in some cases mitigating certain risks for the first-movers,” says Chey. “But, ultimately, what usually moves the needle is when they see the business case and hear from clients about the gap in the market.”

“As our investor base becomes more sophisticated, there is increasing demand on banks and market-makers to up the game, and build pricing and matching engines here in Singapore,” he adds.

According to the 2019 Bank for International Settlements’ FX survey, trading volumes in Singapore rose to a daily average of $633 billion in April – a 22% increase on the same month in 2016.

Rivals in Asia

However, competition is rising in Asia as FX trading activity in Hong Kong soared by 45% between 2016 and 2019 to $632 billion, a hair’s breadth away from Singapore volumes.

Yet, with protests and US-China trade tensions currently rattling Hong Kong, Singapore may have an edge. Chey highlights “Singapore’s sound and transparent legal and regulatory framework” in supporting the country’s financial ecosystem and other professional services.

…for the foreseeable future, the world is far more comfortable doing business with Singapore than they are with China

Jon Vollemaere, R5FX

“We are well placed in that regard because our judicial system is well regarded and based on common law,” he says. “In the past decade we’ve also made a big push into alternative means of dispute resolution, like arbitration. It’s all these little pieces that have to come together alongside demand from the market.”

“I think, for the foreseeable future, the world is far more comfortable doing business with Singapore than they are with China,” says Jon Vollemaere, chief executive of emerging market FX trading platform R5FX. “For now, it’s just easier.”

He has seen three clients set up shop in the country in this quarter.

Alina Karpichenko, low latency solutions manager for capital markets at IT infrastructure firm Avelacom, agrees Singapore is a growing Asian hub: “Singapore is interesting because many firms who are active in arbitrage and volatility-driven strategies across Apac use Singapore as a base, with the need for the most sophisticated and cutting-edge technology to support this trading activity.”

Reduced latency between Europe and Singapore will be useful for firms trading with Asia, Karpichenko adds. While the average latency time to London is 159 milliseconds across the industry, the best round-trip number that can be achieved on Avelacom networks between the two cities is 147.2 milliseconds, she explains.

However, for Chey, the attraction in establishing FX matching engines in Singapore is more than a latency issue.

“Sometimes the market gets distracted by latency and other technical issues, but underlying this is the growing demand for FX risk management solutions in Asia, among other trends,” he says. “This is important because without that it wouldn’t translate into business.”