Tuesday, November 10, 2009

Direct Market Access Anyone?

Press release by Bursa
9 Nov 2009
Bursa Malaysia today introduced Direct Market Access (DMA) for the equities market which is aimed to enhance trading efficiency and accessibility for market participants. With this, the Exchange will be providing a complete DMA infrastructure for both the equities and derivatives markets. The DMA for derivatives market was successfully launched in April 2008.

Bursa Malaysia Berhad’s Chief Executive Officer, Dato’ Yusli Mohamed Yusoff said, “DMA is a critical component for Bursa Malaysia to remain competitive in the global investment arena. We are committed to investing in the right technologies to promote market accessibility and liquidity, as well as increased trading efficiencies. This will enable us to meet the requirement for growth and alignment with international trading practices.”

“We are confident that similar to our experience with DMA derivatives, DMA equities will attract new segment of trading participation given its increased accessibility and low latency. Market participants will also be able to enjoy greater connectivity and more control of their orders via the DMA infrastructure for equities market,” he added.

The benefits of DMA:
  • It is a ‘zero-touch electronic trading’ solution which enables investors to route orders directly to the Exchange for immediate execution.
  • It will significantly reduce the time for orders to be sent and matched from the previous average of three (3) seconds per transaction to a fraction of a second.
  • It has the ability to support algorithmic and block trading which allows institutional investors greater control through using pre-determined order conditions.
  • It provides greater access to international investors as Bursa Malaysia allows ‘Sponsored Access’ for institutional investors.
  • It enables market participants to connect their own trading front-end to the Financial Information Exchange (FIX) DMA Gateway.
  • It allows market participants to install their own servers in the Exchange’s data centre through the co-location hosting service where faster order management can be processed and lower latency when trading.
Just some notes on this development :

The US Sec is already questioning the "Sponsored Access" and is planning to come out with more regulations to ensure that proper controls are in place especially when Non-Regulated Entities are accessing the Public Market directly......

This is what the SEC Chairman said

"I liken it to giving your car keys to a friend who doesn't have a license and letting him drive unaccompanied," Schapiro said at a Wall Street conference in New York.

I don't know the specifications on Bursa's project nor the respective regulatory guidelines but just some concerns:

  1. How will limit management/exposure management function at Individual Brokers be? Assuming sponsored institutional investors can now access market directly via high-speed algorithm trading, how will their open orders/matched trades be validated against their limit or collateral pledged at the clearing members? Or will they have to pledge collateral at the Clearing Corporation in return for DMA?
  2. How does this fit into the picture of regional exchange alliance whereby the respective ASEAN Exchanges have entered into a potential commitment with a Vendor to undertake a massive intra-exchange order routing? Will the DMA allow for another exchange to connect directly to Bursa and if so why do the order routing project in the first place because two way traffic can be achieved via bilateral arrangement as and when each exchanges are ready instead of going for a big-bang approach when the ultimate beneficiaries are the Singaporean Intermediaries since all the largest global funds are based out of there with close to USD 1 Trillion of Asset Under Management?
After the demutualisation of Bursa Malaysia the underlying relationship between Exchange and its members technically moves into a potential competition environment whereby members are no longer obliged to match trades on the exchange and sustain exchange monopolistic environment, globally exchange business is a dying business and they need to compete with other matching mechanism for example Alternative Trading Systems or even its members who are internally matching its trade without routing the trades to the exchange or what some people are calling "dark liquidity"....that itself is another issue altogether

Well Mdm Zarinah would love to hear your tots on the matter....

Minds are like parachutes; they work best when open. -Lord Thomas Dewer