Singapore staves off threats to its FX crown

By:
Paul Golden
Published on:

Singapore is steadily fending off threats to its position as Asia’s largest FX trading centre, threats that include liquidity concerns, growing volumes in Hong Kong and the rise of Shanghai.

Last year’s Bank of International Settlements data on global FX trading made pleasant reading for Singapore, showing that the island state had grown its market share by 30% from in 2015.

However, research firm Investment Trends highlights the complexity of the country’s retail market in its 2016 ‘Singapore CFD and FX report’. It found that an estimated 22,300 individuals placed at least one FX trade last year — down from 24,500 in 2015, with almost half of all previously active traders not placing a single trade during 2016 — yet the number of new brokers increased over the same period.

Despite one in seven traders placing a trade through a new market entrant last year, the report also found that just 7% had switched broker. Of the eight markets covered by Investment Trends, Singapore now has the lowest level of attrition due to switching.

Further growth will be seen in the corporate space as incentives for regional treasury centres kick in and they begin to set up hubs in Singapore, suggests Michael Go, head of FX market development for Asia Pacific at Thomson Reuters.

Buy-side electronification

Most buy-side players are already electronic market participants — a market segment that will grow further, Go adds: “FX growth in Singapore will be further strengthened if it continues to support the Asian headquarters for mega banks, global institutional investors and multinational companies, as well as the leading private wealth management firms in Asia.”

According to Harpal Sandhu, CEO of FX technology firm Integral, buy-side electronification represents an opportunity for Singapore to attract liquidity from customers in the region and encourage them to transfer risk amongst themselves without the support of big dealers.

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Michael Go, Thomson
Reuters

“In addition,” he says, “the credit equation can be managed with much lower risk as automation allows for more efficient margin management. As the dual problems of liquidity and credit are solved, the shift to local market matching will accelerate.”

Non-deliverable forward trading — which was a purely voice-driven market as recently as four years ago — has moved to predominantly trading electronically in the inter-dealer market on NEX Markets’ EBS platform, particularly for liquid one-month NDFs, observes Jeff Ward, head of NDFs and forwards and head of FX Asia for the firm.

Ward notes that while the largest banks are key players, local and regional banks are strong in Australian, New Zealand and Singaporean dollars, offshore renminbi, other Asean pairs and NDF markets: “The major non-bank market makers are increasingly important as market makers and liquidity providers — especially for more liquid products such as G20 spot — although not for FX forwards or swaps due to credit access and/or balance-sheet limitations.”

Non-bank liquidity providers are gaining market traction with lower costs and flexibility of algorithmic trading, adds Dongyal Lim, senior sales trader with CMC Markets in Singapore: “The global banks that have long dominated the FX market in Singapore are coming under growing regulatory pressure. Data interpretation also allows non-bank entities to deliver unique pricing to market participants.”

The competition

Jon Vollemaere, CEO of local trading platform R5, describes Singapore as strategically important to his business, with more than half of trading volumes coming from Asia since the start of the year.

“Singapore is also the third largest market for offshore renminbi, behind Hong Kong and London,” he says. “Overtaking Tokyo was just the start; the big question is will it continue to stay in front of Shanghai? Three years ago we said ‘yes’, but it might well be a different story by 2020. Competition from China’s financial hub will be stiff, but regulation, language and location have all played a part in the rise of Singapore and will continue to do so.”

Vollemaere also praises the Monetary Authority of Singapore’s support for financial technology, suggesting that it will drive further electronification of FX within the city state and across the region through initiatives such as technology business accelerator FinLab.

Network provider BSO added Singapore to its FX circuit in June, improving latency between London and Singapore. Chief operations officer Emmanuel Pelle says that while there are expanding FX liquidity pools from Chicago to Shanghai, Dubai to Mumbai and Chicago to Tokyo, Singapore remains the hot spot for growth in over-the-counter trading across emerging markets.

“Our clients typically want to be connected to the major exchanges, including SGX Singapore,” Pelle concludes. “Much of this flow is driven by the dominant interbank players, although a growing proportion of activity can also be attributed to a wider interest in currency trading as the asset class becomes more assessable to the retail investor.”