The Monetary Authority of Singapore is scoring more successes in its bid to vault past Tokyo as the world’s third-most important center for trading foreign exchange – and put silver medalist New York within striking distance.
Earlier this year, BNY Mellon set up desks in Singapore to trade G10 currencies, including spot and forwards, short-term interest rates, and program trading (trading baskets such as indexes).
“We’re using all our liquidity sources to achieve best execution,” said Darren Boulos, head of FX sales and trading for Asia Pacific.
BNY Mellon joins about a dozen other global firms that have done the same over the past year. Singapore has always been an FX hub but since early 2019, MAS has been offering incentives to attract relevant banks to build the infrastructure to price and match trades in a data center known as Singapore Server One, or SG1.
This data center, operated by telecom companies, is where Singapore Exchange and big forex banks have located their servers. That proximity, known as co-location, is critical for a market that feeds on super low-latency trading (that is to say, very very fast). If FX trades originate and price in Singapore, it shaves off critical milliseconds from waiting to complete transactions originated in Tokyo or London.
Although Citi, Standard Chartered, UBS and other banks have been building up their Singapore capabilities for some time, it is the arrival of other players such as BNY Mellon that is lending support to MAS’s FX ambition. It’s not just about adding yet more banks: BNY Mellon brings a different kind of client to the table.
The bank is a $35 trillion custodian servicing pension funds, insurance companies and sovereign wealth funds, which represent a different source of transacting than the other banks, prime brokers, hedge funds, corporate treasuries, and electronic market-makers that dominate FX trading.
“Our flow is more ‘real money’ asset managers,” Boulos said. “We’re building alternative liquidity pools for counterparties that want to see that kind of flow.” He added that this buildout began in New York, with Singapore now the bank’s second location for its servers handling FX.
FX’s pecking order
That is a remarkable vote of confidence in Singapore, given that BNY Mellon chose it over London as its first hub outside the U.S. London is by far the dominant global forex hub, commanding 43% of all volumes, according to an influential 2019 market survey by Bank of International Settlements.
New York is a distant second with about 12% of volume and Singapore is third with 7%, ahead of Hong Kong and Tokyo.
But that pecking order does not reflect the reality that for most banks, Tokyo, not Singapore, has been their traditional hub for price discovery and price matching. Although Singapore and Hong Kong each enjoy bigger volumes, the industry’s infrastructure is still mostly based in Japan.
It’s not just MAS that wants to grow the FX business. Singapore Exchange is keen to boost FX contracts that trade on it. Contracts traded over exchange serving as a central counterparty brings transparency and lower costs to the market.
This is a trend that began in 2015 when Deutsche Börse acquired FX trading platform 360T. Others like CME followed, and now SGX is building its own capability.
This in turn forces banks to further automate their own trading businesses and encourages the consolidation of pricing activity – which reinforced the London-New York-Tokyo oligopoly.
With FX OTC spot trading, two interbank vendors dominate the market: EBS (owned by CME), and Refinitiv (which many in the industry still refer to as Reuters). Refinitiv’s matching engine is in London, while EBS has three: London, New York, and Tokyo.
“FX is latency-sensitive,” said Martin Watson, managing director and global head of spot eFX trading at Citi in Singapore. “Our price construction models are co-located along primary market matching engines,” along with other locations in order to deliver the most accurate prices possible.
MAS is keen for these vendors to add Singapore as a fourth location, although industry execs speculate that EBS is likely to trim its locations instead.
This is what Singapore wants to steal or overtake: not just as a booking center for trades, but to be the place where price discovery and matching actually takes place, making Singapore the preeminent market for spot, swaps, forwards, non-deliverable forwards, and options.
And that means convincing banks to build costly infrastructure in Singapore and SG1, a local data center where the stock exchange bases its servers. Today, even if trading takes place in Singapore, the actual matching usually happens at TY3, a data center in Tokyo.
Foreign exchange is the world’s largest capital market, with the BIS last year reporting FX average daily volumes of $6.6 trillion.
The biggest portion of that market (61%) is swaps, which is dominated by inter-bank trading. Banks engage in currency swaps to support a range of other trades, hedges, and structured products, either for clients or for their own books and daily capital management.
If traders get the pricing they see, they are likely to build greater trading volumeJohn Knuff, Equinix
The swaps market is global but just three currencies dominate transactions: the U.S. dollar, the euro, and the yen. This is true even when there is no entity or asset involved from those markets; these currencies are more likely to be traded offshore than at home, with a small number of global and regional banks controlling inventory and trading.
The spot market, which accounts for about 30% of forex trading, tends to be used more by hedge funds, electronic market-makers, and the prime brokers that serve them. It too is concentrated in the biggest trading centers.
Although Tokyo’s volumes are far behind Singapore and Hong Kong, the yen is a top-three global currency. This reflects Japan’s long history as Asia’s most industrialized and wealthiest economy, plus its huge retail market for currencies – a “natural” demand, as industry players term it.
As a result, Tokyo has remained the region’s most influential FX hub, even if Singapore and Hong Kong have overtaken it in actual volumes. The Tokyo “fix” at 10 a.m. each morning sets prices for commercial transactions in forex. Other than London’s 4pm fix, Tokyo’s is the most important activity in forex.
These prices are set in the TY3 data server, operated by a vendor, Equinix, so participants in the rest of Asia Pacific must route their orders to it (or to similar data centers in London).
“If traders [in Singapore] get the pricing they see, because trades originate and price there, they are more likely to build greater trading volume,” said John Knuff, global head of financial services at Equinix, in New York.
Japan is likely to dominate retail FX price matching because of its domestic demand. Singapore is trying to become the region’s primary hub for institutional flow, as part of its broader mission to dominate infrastructure for payments. Banks are expanding their trading infrastructure there in expectation that this will happen.
Market players expect Singapore will eventually overtake Japan, and possibly by 2030 even New York. Singapore faces headwinds, though.
We also need the buy side and vendors to anchor themselves in SingaporeMichele Wee, Standard Chartered Bank
First, Tokyo dominates the yen cross, which everyone trades, so there’s a limit to how much action Singapore can win. Tokyo already is home to the major electronic communication networks (ECNs) like EBS, as well as all the biggest banks, hedge funds and other players. Singapore’s liquidity pool is limited in comparison, so the expense of co-locating servers there may not be worth it for many firms.
Japan has also traditionally served as a backup for London servers in the event of a disaster or business shutdown. Singapore might make sense as a contingency for pan-Asia players but not global ones.
FX and the future
Singapore’s long-term advantage is regional growth. Japan’s retail market is not growing, whereas India and Southeast Asia’s economies are. Singapore’s natural demand will increase. But it’s a work in progress.
“We also need the buy-side community and vendors to continue to anchor themselves in Singapore,” said Michele Wee, managing director and head of financial markets for Singapore, Australia and Brunei at Standard Chartered Bank.
Singapore is a stable, proven financial center. MAS is succeeding at attracting the big liquidity providers. But clients are another matter: this requires waiting for more demand from the region.
The evolving internet economy is growing in size in Southeast Asia, which could be one catalyst: e-commerce sellers will want their FX dealers to provide the best execution, says Wee.
Getting FX right can therefore support commerce, creating a virtuous feedback loop. The infrastructure for FX has influence beyond the traditional capital markets industry.
Singapore is aiming for a global relevance beyond its own back yard – and beyond FX. For example, more low-latency trading of any asset class is moving to cloud.
Cryptocurrency exchanges are actually leading the way, but fiat currency trades are beginning to follow. This same infrastructure underpins blockchains, including those run by banks. Attracting infrastructure to Singapore could have implications beyond just influence in FX.