Poverty and Development Division
Economic and Social Survey of Asia and the Pacific, 1999
VII. FINANCIAL FLOWS
Box VII.1. ICT applications in the Thai financial system and their impact
The applications of ICT can be viewed as mechanisms to allow financial resources to be allocated flexibly across space, time, institutional framework and jurisdiction. Detailed examples of these aspects in relation to Thailand are discussed below.
Telephone banking permits individual bank customers to complete transactions without having to go to the bank premises, for example, balance checking, enquiries about interest rates or exchange rates, inter-account fund transfers, and settlements. Between 1992 and 1996, telephone banking services in Thailand grew rapidly and steadily, the growth rate of the number of customers and utilization averaging 67 and 33 per cent per annum respectively. However, the average number of calls per month had fallen from 1.4 million at the end of 1996 to 1.2 million by the end of June 1997 with the economic slowdown. Meanwhile, the number of customer accounts had continued to rise from 623,328 at the end of December 1996 to 834,783 by the end of June 1997.
Corporate customers have been offered office-banking services analogous to private telephone banking. The market size and frequency of use of these services, however, have been somewhat lower, growing on average by 27 per cent per annum between 1991 and 1996 (although trending upward to over 30 per cent in 1996). As of the end of 1996, there were only 17,367 customers registered under this category.
Electronic fund transfer at point of sale
At the retail level, the use of electronic fund transfer at point of sale (POS) also contributes to the ease of economic transactions across space. At each point of sale, an electronic data capture machine is used to transfer funds from verified bank customer accounts to those of the selling unit immediately with direct instructions to bank computer centres. This is completed without any cash payment. Each POS is equipped with a calculator, a magnetic card slot and a keyboard for the customer to punch in his or her PIN number. POS is then linked to commercial banks through telephone lines. With the correct magnetic card and PIN number issued by a bank to its designated customer, the machine will then proceed to verify if the account balance is sufficient for the transaction and complete it accordingly. Owing to the limited number of member selling units, mainly major department stores, and the fact that electronic data capture machines are expensive, the use of POS was not widespread up to 1994. In fact, the number of customer utilizations fell from 14,198 per month in 1990 to only 2,888 per month in 1995. Since 1996, however, with the increasing popularity of debit cards and a campaign by commercial banks to install electronic data capture machines in department stores, supermarkets, hospitals etc., the number of POS had risen from 486 in 1995 to 2,585 by the end of June 1997, and the number of transactions to 12,450 per month.
Automated teller machines
Commercial banks in Thailand expanded a number of services using plastic cards, ranging from ATM cards, credit cards and debit cards to smart cards which, through the use of microchips, can perform multifunctions, giving customers more convenient delivery of services by lowering the need to hold various cards simultaneously. ATM cards are also being developed, and some have already been finalized for utilities and telephone bill payments, loan applications, interest rates and exchange rates enquiries, as well as details on any other services of the bank. The popularity of ATMs contributed to their rapid growth: by the end of June 1997, 4,514 machines were located throughout the country. ATM cards are among the most widely used cards in Thailand. By the end of June 1997, there were 16.1 million ATM cards in use, and total monthly withdrawals using these cards averaged 63.3 billion baht.
In the public sector, attempts to develop a modern infrastructure, particularly the three systems introduced by the Bank of Thailand to establish electronic clearing and settlement systems, have also contributed to changes in the ways in which commercial banks conduct their business. These systems are bahtnet, electronic cheque clearing, and media clearing. Bahtnet is an electronic network used by the Bank of Thailand to exchange information with its member financial institutions. This is a system based on a digital lease line for real-time information. It can be used for either intra- or inter-financial institutions fund transfers, balance enquiries, confirmation of transactions, or simply announcements.
Electronic cheque clearing, on the other hand, is part of the "Thaiclear" system, which is used for interbank account electronic settlements, particularly cheque clearing. It sends high-speed transmissions through a digital lease line to the cheque clearing centre, and verification of the actual cheques follows. The balances resulting from the centre form the basis for intra-day and overnight claims of banks on each other. The same day clearing enhances client liquidity, while lowering demand for manual work and avoiding human errors.
Media clearing is also part of the Thaiclear system and is used for interbank settlement of retail customer accounts. In this system, member banks send claims and transfer instructions to the clearing centre via magnetic tapes or discs for the centre to calculate balances and settle them through bahtnet.
Stock markets are active users of ICT for clearing of trades as well as their placement (see annex for more details). This is certainly the case for the Stock Exchange of Thailand. The Automated System for the Stock Exchange of Thailand was established in April 1991. This aimed to provide its members with more equitable and accessible trading services and to decrease the human error inherent in the floor trading system. The new trading facility was further developed in June 1992 into a scripless system (without physical transfer of the equity ownership certificates) by incorporating securities deposit services into the trading and settlement system. To facilitate trading, in April 1994 a service was inaugurated to compile, analyse and disseminate securities information electronically in order to provide comprehensive, accurate and timely information for the public. Finally, in January 1995, the securities deposit service was made into a separate company, the Securities Deposit Centre Co. Ltd., designed to take care of all back office (settlements, securities transfer, deposits and registration) services with intensive use of ICT.
It is not possible to attribute many of the visible developments in the financial areas only to the use of ICT. However, it should be noted that the average net capital inflows into Thailand accelerated from 20 billion baht per month during the period 1991-1994 to a peak of 50 billion baht per month at the beginning of 1996. Most of this rise was attributed to the opening of the Bangkok International Banking Facility, which was a new modern, ICT-based financial facility authorized to channel funds from overseas to the Thai private sector in foreign currency.
Concomitantly with its modernization, SET experienced a rapid expansion during the 1986-1994 period. The average daily trading volume rose from 101 million baht in 1986 to over 8 billion baht in 1993-1994.a The SET index rose from 207 in 1986 to a peak of 1,683 in 1993 before falling moderately to 1,360 in 1994. Market capitalization rose from 75 billion baht in 1986 to a peak of 3.3 trillion baht in 1993.
With ICT advancements, the use of ATMs lowers costs and increases ease of transaction. With the benefits of POS augmented by telecommunicated advertisements, the tastes and preferences of people can be significantly swayed towards consumerism. Concomitantly with the spread of ATMs, household average propensity to save fell from a peak of 20 per cent in 1989 to only 11 per cent in 1995b and has remained in the 10 per cent range since then.
In addition, with the introduction of bahtnet, the electronic cheque clearing system and the media clearing system, the Bank of Thailand was adding to the pressure to modernize the Thai financial system, lower the cost of transactions and lower demand for currency notes. While such modern infrastructure induces economies of scale and enhances the efficiency of commercial banking services, it also encourages these banks to invest in hardware, software and human resources to maintain compatibility, that is, moving towards real-time transactions and to construct networks, which adds to their costs.
Perhaps most significantly, the more rapid fund transfers between corporations and financial institutions, as well as among corporations themselves, make the central bank supervision of the financial sector, which had been concentrated basically on the financial institutions, inadequate and in need of modernization.
a Maruay Padoongsith, "Securities and equity markets", in Aran Tammano (ed.), Twenty-five Years of Thailand's Economic Development: B.E. 2515-2539 (1972-1996): 25th Anniversary of Maha Thanakit (1997), pp. 337-340. (In Thai)
b Roong Poshyananda, "Private saving in Thailand: determining factors and channels for mobilization", Papers on Policy Analysis and Assessment (Bank of Thailand, 1995), p. 57.
Source: The information in this box was provided by Pichit Patrawimolpon, Research Economist, Central Bank of Thailand. The microeconomic level data are drawn heavily from Varoonrat Chaiyasut, "Future technology and banking and finance", Siam Commercial Bank Economic Perspectives, December 1997. (In Thai)
Box VII.2. Capital markets in Singapore
Stock Exchange of Singapore
Developments in the use of ICT
The first phase of automation in SES began in 1982 with the installation of an electronic trading board in the trading room. Quotations were put up on the board through computer terminals. Stockbrokers received trading information through a network of computer terminals in their offices. Buy and sell instructions were conveyed to their trading room clerks on the trading floor through normal telephone lines. In 1987, a second board, SESDAQ, was launched, using a fully computerized trading system and a scripless book-entry settlement system, paving the way for floorless and scripless trading. In 1988, a semi-automated trading system replaced the electronic scoreboard for trading of mainboard stocks. With this system, orders were routed to the trading floor through a computer network, without telephone contact between stockbrokers and trading clerks but maintaining an open outcry auction system on the trading floor.
A fully computerized trading system called Central Limit Order Book (CLOB) was introduced in March 1989, doing away with the need for a trading floor. Under this system, workstations installed at brokers' offices are linked directly to the SES computer system. Investors' orders are entered and matched in the CLOB system and confirmation is sent to the brokers instantaneously. The CLOB system maintains an order book for every traded stock and matches buy and sell orders. Orders in the CLOB system are held according to price, and then time priority.
Recently, the Internet has caught on as a communication and business tool. SES developed a system for member firms to interface through the Internet with CLOB for order inputs and, with this, access to real-time quotes, investment research, historical stock charts and portfolio management tools. A book-entry settlement system pioneered by SESDAQ was implemented for new listings on the mainboard in May 1994. The conversion exercise for all mainboard listed companies was completed by June 1994. Share ownership and changes in ownership of all securities are effected by book entries in the securities accounts that shareholders maintain with the Central Depository Pte Ltd, a subsidiary of SES, which operates the depository and computerized book-entry transfer system for the Singapore stock market. It records all scripless transactions electronically and acts as a central nominee holding securities on behalf of the depositors.
Computerization has increased productivity. The introduction of computerized trading has done away with the trading floor and trading clerks. As seen in the table, turnover in trade has increased tremendously without a corresponding rise in employment. On the trading floor, the record volume traded was 85.7 million units on a single day. The record achieved since the implementation of the computerized trading is 1.28 billion units on 6 February 1998.
Turnover on the mainboard of the Stock Exchange of Singapore (before and after computerization)
Note: Fully computerized trading began in March 1989.
With scripless settlement, the number of back office staff has decreased, and there is no need for manual sorting of share certificates. Stockbrokers' workstations provide comprehensive information about the market, such as market summary, aggregate quantity of outstanding orders at each price, number of shares transacted at each price, and corporate actions. Such information has increased the transparency of the market and stockbrokers are in a better position to inform investors. The computerized system provides a fair and transparent order routing and execution trading system with price and time priority. It is also more efficient as trades are matched instantaneously, regardless of volume, resulting in capacity for high turnover. This makes for a more liquid market.
Singapore International Monetary Exchange Limited
Developments in the use of ICT
SIMEX is one of Asia's first and most developed futures markets trading several derivative products and closely tied to futures markets in developed countries, particularly the United States, as a curb market. It will be merged with SES in the not-too-distant future. As a futures market, SIMEX has been very active in upgrading its trading facilities in line with new applications of ICT. Also, as a curb market trading instruments from other markets, it needs to use electronic means to undertake this activity. SIMEX is now a fully electronic market.
Members of the Exchange seem to show a general preference for electronic trading facilities. Lower levels of staffing in such an environment in the Exchange offices suggest that operating costs are indeed lower. Moreover, electronic trading has enabled the Exchange to extend its trading hours to better meet the needs of international traders. The extension of hours also focuses traders' participation onto a central market during times of the day when SIMEX is the only market for trading such instruments, thereby enhancing both the breadth and the depth of the market and making its price discovery process more robust.
On the whole, electronic trading has added to the overall performance of the Exchange by extending business beyond traditional business hours. Further, trading volume in after-hours business has been growing. However, while such electronic trading and the use of technological innovations generally benefit the business efficiency of the Exchange, the benefits are not specifically for any particular group of market participants.
Experience also suggests that one primary impact of ICT is the exaggeration and acceleration of a perceived market direction, through a wider dissemination of news and views.
Source: The information in this box is based on communications from SES and SIMEX, December 1998.
THE APPLICATION OF ICT IN STOCK MARKETS
Amongst the significant factors causing rapid change at stock exchanges throughout the world is the pressure that large banks and institutions are putting on exchanges to become more streamlined and efficient. These financial institutions have invested heavily in computer systems to increase efficiency and lower costs and are pushing exchanges to do the same. The financial markets of the next century will probably be dominated by powerful computer systems and driven by the needs of demanding and cost-conscious global investors who want the capability to trade rapidly across time zones, currencies and types of securities. In addition, the dramatic increase in the use of the Internet is opening up new avenues of trading opportunity at a rapid pace and therefore increasing the pressure on stock exchanges.a
One of the most significant changes in the equities markets in recent years has been the growth of trading of stocks outside the exchange on which they are listed. In many Asian countries and elsewhere around the globe, floor-based trading has been replaced with screen-based, off-floor trading provided by the stock exchange. But technology is now allowing trading to occur away from both the floor-based and screen-based trading mechanisms of established exchanges through low-budget electronic communications networks. It is estimated that the new networks, fed by the recent flood of activity from investors actively trading over the Internet, are now involved in as much as 35 per cent of the trades on NASDAQ. Many market observers say the networks will capture much more volume as they offer lower costs for retail investors and institutional portfolio managers.
The growth of the global securities market and the corresponding demand for immediate and accurate information processing have driven the need for improvement of ICT at stock exchanges in Asia.b Almost every stock exchange in Asia has implemented new trading system technology in the past decade. As their trading activity grew, many of the exchanges decided to automate their activities. These have not been one-time changes. There is a continuing evaluation of business needs and emerging technologies, leading to frequent modifications in systems to address the rapidly changing and competitive requirements of financial communities. The following case studies highlight the experiences of selected countries with respect to the application and impact of ICT on their stock markets.
Republic of Korea
The Korea Stock Exchange (KSE)c opened for trading in March 1956. In January 1975, an automated continuous trading system replaced the manual, open-outcry system. The nerve centre of KSE is the Korea Securities Computer Corporation (KOSCOM), a 21-year old subsidiary of the Exchange which handles the automated stock trading system of KSE and processes all transactions. KOSCOM is responsible for the system which connects brokerage companies to KSE and allows for the processing and delivery of orders, order-match execution, execution confirmation and the dissemination of market information on behalf of KSE. KOSCOM supports linkages to thousands of terminals and computer systems throughout the Republic of Korea through the KSE network system. When an investor places an order through a securities firm, the account management and order routing system (AMORS) checks the details for the investor's account, confirms the order and directly forwards it to the automated trading system (ATS) for execution. AMORS became operational in February 1983 and the new ATS was launched in March 1988. Once execution is complete, the result is sent back to the securities firm and the investor's account information is simultaneously updated. In addition, the system processes real-time cash deposits and withdrawals (clearing and settlement functions), dividend administration and instalment savings account transactions. ATS was developed in-house and has reduced the time taken under the previous manual process on the stock exchange floor to execute a trade from up to several hours to well under a minute. ATS automatically matches orders received from AMORS without any manual intervention on a first-in, first-out basis at the best available price in the market. With the establishment of a stock index futures market in May 1996 and a stock index option market in July 1997, the KOSCOM trading system also acts as an integrated system handling stocks, bonds, and futures and options contracts.
KSE provides various means for investors to gain access to market information. Most pre- and post-market price information is electronically provided on a real-time basis. Investors can find market-related information such as scientific analyses of stock, bond and stock index futures contracts and public announcements through the computer terminals of the securities information system, which is integrated with ATS. The system also provides economic and financial news from both domestic and foreign information providers through a Windows-based graphic interface.
The implementation of ICT at KSE is a good example of response to the need for constant evaluation of business needs and emerging technologies, leading to frequent modifications of systems. In January 1995 a comprehensive surveillance and information system was launched to instil confidence in the market in domestic and international investors and institutions. The principal procedures utilized by KSE to maintain an orderly market include the following:
Daily price range limits. In order to avoid wide price fluctuations and foster an orderly market, KSE sets a daily price change limit. Under this scheme, the stock price of an issue is not allowed to fluctuate by more than 15 per cent from the previous day's closing price.
Trading halt. When a share price and/or trading activity of an issue shows an abrupt movement in response to an unidentified rumour or news report, KSE can halt trading to protect the investing public. In such cases, KSE requests the company concerned to make a direct disclosure on the matter. Trading can be resumed at the next session after the company makes this disclosure. However, if the rumour which disturbs trading is not resolved by direct disclosure, resumption of trading may be delayed.
Sidecar. With the establishment of the stock index futures market, KSE introduced the so-called "sidecar", to minimize the possible adverse effects that programme trading might cause and to ensure stable operation of both the futures and the underlying cash markets. Under this system, when any contract price hits 4 per cent of the previous day's closing price for one minute, the execution of programme trading orders is delayed for five minutes. The sidecar system operates only once a day and the order routing resumes immediately after the five minutes.
Circuit breakers. If, at the opening of a session, the overall index of stock prices continues to fall from the previous close by more than 10 per cent for more than one minute, trading of all stocks will be halted for 30 minutes. Twenty minutes after the circuit breaker is instituted, KSE will collect orders from its members for 10 minutes. Then, stock trading will resume in the form of call trading.
In November 1996, KSE introduced an after-hour trading session and new forms of orders (market, limit-on-close and market-on-close orders). In September 1997, the trading system was fully computerized and the Exchange moved to a completely floor-less trading environment.
A strong case can be made for associating the rapid growth of business on the Stock Exchange of Thailand (SET)d with the steady modernization of its operations and the use of ICT. Starting in May 1991, SET began trading with a fully computerized, screen-based trading system which eliminated the need for a trading floor. Until that time, a manual trading floor system with an open-outcry auction, similar to that of many other Asian markets, was used. However, this system was bursting at the seams; the SET staff estimated that, on busy days, up to a quarter of the orders were not being executed owing to its inability to cope with the excessive volume. In addition, brokerage companies wanted to expand outside Bangkok to offices throughout the country and to attract international investors. To do this, the Exchange needed to upgrade its system and provide timely and accurate market data. The technology requirements of the new system included a distributed client/server architecture and a design flexible enough to accommodate rapidly increasing volumes and modifications with ease. SET required a complete technology transfer from the vendor of the system to its newly hired ICT staff, including all source codes and training to operate, maintain and enhance the new system. SET was also determined to publish an open applications programmer interface to allow brokers to connect their own application systems to SET in a distributed configuration.
SET selected an order-driven, screen-based system provided by a subsidiary of the Chicago Stock Exchange. Then, new trading rules were written and submitted to the government for approval. A significant upgrade to the existing regulatory and surveillance systems was also undertaken. Among the many features of the Automated System for the Stock Exchange of Thailand (ASSET) are a pre-open order-entry period and auction opening; continuous automated order-driven matching; a central order book management facility; daily price range limits; entry of negotiated deals completed outside the system; real-time market data display, including best bid and offer; market statistics and index calculations; proactive market surveillance and regulation tools, including alerts; news reporting and electronic messaging capability; and interfaces with clearing, settlement and depository. ASSET was implemented in May 1991, and in June 1992 the SET Share Depository Centre adopted a scripless system for stocks. This system now also covers debentures and warrants.
The overall cost for conversion on SET was much higher than for many other exchanges in the region. This was largely due to the fact that, in lieu of providing direct access terminals, SET mandated that each member should acquire its own trading application software and hardware to connect to ASSET. The cost of conversion to SET was between $12 and $20 million. The cost of software and hardware was only part of this amount, which also included the cost of creating a communications infrastructure, adding staff and providing training. These costs were met mainly by the sale of new memberships to the Exchange in 1991. The funds raised were also used to build a new facility for SET and to enhance market surveillance functions.
There were many important challenges during the course of the implementation. As an example, owing to the SET requirement that each broker should be connected from his office and the government requirement that these offices should be geographically dispersed throughout Thailand, it was necessary to undertake a thorough analysis of the communications infrastructure and promote the use of satellite communications. The development of a strategic plan was used to plan for reliable access, quick response time and sufficient back-up capability to handle peak volumes, and a significant upgrade of the Exchange communications infrastructure was undertaken. Another important challenge was the writing of new rules and regulations for the new trading system. The Exchange established a board-level committee made up of members, government officials, SET staff and representatives of the investor community to do this. The government had to approve the new rule changes prior to the implementation of the new trading system.
In response to the recent economic crisis, SET has announced a series of new regulations and initiatives to improve the integrity of the market place, to ensure that the regulations are suited to the changing economic situation and to improve the quality of companies listed. These initiatives included enhanced surveillance and monitoring systems and additional regulatory controls, such as circuit breakers, as support measures for its previously existing floor and ceiling trading limits. Under the new rules, a market-wide halt is determined by the percentage movement of the SET index, instead of the actual number of points; trading is suspended for 30 minutes if the overall index of stock prices declines by 10 per cent over the previous close, and for one hour if the index falls by 20 per cent. SET plans to launch a new market for SMEs. This market will be separated from the main market to allow independence and flexibility. In addition, SET has recently announced plans for the introduction of trading in stock index options as a first step in establishing a complete derivatives market.
The Philippine stock market is one of the oldest in Asia. There used to be two exchanges, the Manila Stock Exchange established in 1927 and the Makati Stock Exchange organized in 1963. Although the two exchanges remained as separate entities, they were basically trading the same listed issues. In the early 1990s, the Securities and Exchange Commission was granted $13.5 million by USAID for the local securities industry, a portion of which was earmarked for the projected unification of the exchanges. In fact, the implementation of ICT at the two exchanges played a significant role in the creation of the merged Philippine Stock Exchange (PSE).e In 1992, the Manila Stock Exchange automated its trading operation with a system provided by a local software company. Faced with a loss of order flow as a result of the automation of the Manila Stock Exchange, the Makati Stock Exchange decided to automate its trading operation with a system based upon the system used by SET in Thailand, with minor customization, and was able to do so within four months of signing the contract. The system was utilized to provide screen-based, on-floor trading, with a fully automated high-capacity order-match, fast response time and the ability to handle more than 300 users. The cost for conversion was less than $4 million, including all hardware, software and infrastructure-associated costs. The initial implementation called for 150 direct access terminals on the trading floor with a small number (10-15) of remote connections. In addition, owing to constraints in the supply of electricity countrywide, it was necessary to install two power generators for the computer room and the trading floor. In the first quarter of 1994, after PSE obtained its licence from the Securities and Exchange Commission, its two trading floors were functionally unified through the interface of their computer systems, creating a one-price, one-market exchange. Another milestone for the unified exchange took place when the state-of-the-art principal trading floor at the Philippine Stock Exchange Centre opened in September 1994. The ultra-modern trading floor, patterned after the Tokyo Stock Exchange, adopted an arena-type concept complemented by a huge four-sided electronic board. The floor was designed to accommodate as many as 500 booths, in anticipation of future requirements.
PSE is making efforts to broaden and upgrade the stock market through an array of marketing programmes designed to educate the public on the stock market business and to attract a larger numbers of investors into the capital market. To dispel the notion that the securities industry customarily caters only to big corporations and well-heeled investors, PSE is mounting a campaign to draw small investors into stock trading. The programme is specifically targeted to those investors situated in the countryside who can trade through the computer terminals that have been set up in different parts of the country. These remote terminals provide real-time market data and the ability to route orders directly to the automated trading system.
Public trading of shares in Malaysia began in May 1960, when the Malayan Stock Exchange was formed. In 1961, the board system was introduced with two trading rooms, in Singapore and Kuala Lumpur, that were linked by direct telephone lines into a single market with the same stocks and shares listed in a single set of prices on both boards. The Kuala Lumpur Stock Exchange (KLSE), was established in 1973 and took over operations as the stock exchange in Malaysia. In 1990, Singapore-incorporated companies were de-listed from KLSE and vice versa. The development and importance of the ICT infrastructure at KLSEf are indicative of the plans of many exchanges in the region, with a vision of a fair and orderly market place that is both efficient and cost-effective. The objectives of KLSE in applying ICT are to enhance accessibility of the market to as many investors as possible, locally and abroad; to achieve an efficient trading and settlement system capable of handling one million trades or four billion shares a day; to create a fully-fledged central depository system; and to improve the efficiency of the information dissemination system. It has achieved a full disaster-recovery environment and has developed and installed an efficient office automation system and management information system for the entire KLSE group. A number of ICT-related projects have been included in its developmental plan to improve the post-trade integration level between KLSE and its member companies; to connect KLSE with the outside world through the Internet; and to improve the monitoring and surveillance systems.
As part of its aggressive push to become an Asian-Pacific hub for ICT, the Government of Malaysia is creating the Malaysian Exchange of Securities Dealing and Automated Quotation (MESDAQ)g as a third board of the Malaysian market. MESDAQ, which is modelled on NASDAQ, is intended as an avenue for SMEs in ICT-related areas to raise capital in order to establish a base in the multimedia super-corridor south of Kuala Lumpur.
Impact and lessons
While experts agree that the roots of the economic crisis in Asia are not related to the automation of trading, there has been considerable speculation over the extent to which the magnitude of the 1997 Asian stock market turmoil may have been exacerbated by the use of electronic trading systems. In response to this turmoil, all regulators in the region have focused on improving the regulation, monitoring and surveillance of their markets during these difficult times. It is safe to say, however, that in a floor-based open-outcry trading environment, the drastic drop in the value of share prices of listed companies would still have occurred.
Little systematic research has been undertaken on the impact of electronic trading on volatility. Several studies specifically addressing this impact have recently been commissioned. A futures market study does exist that may shed some light on this issue. In 1994, the Catalyst Institute, Chicago, undertook a research study,h the results of which challenged the widely held view that it was more efficient to trade futures contracts in a traditional open-outcry setting than on computers. The study made a careful comparison of the liquidity and depth of the German Bund futures contract on two futures markets, a traditional open-outcry market that had local traders and an electronic exchange with no locals. Using statistical tests applied to a very large set of trade-by-trade data from the two exchanges, the study showed that bid-ask spreads on the two contracts were virtually the same. Since the completion of this report, reality has validated the study's primary conclusion, and the traditional market has recently announced plans to abandon open-outcry trading. The success of the electronic market highlights what proponents of electronic trading believe is a critical point: by levelling the playing field, electronic trading can attract small participants from the fringes of the market eager to compete with the large market players.
The recognition that the traditional role of exchanges is likely to change has spurred a spate of alliances, partnerships and cooperation agreements among markets seeking to harness the potential of ICT. Whether this trend, which is obvious in Europe and the United States, will spread to Asian markets is difficult to foretell. Most such initiatives are still in the early stages and there are few, if any, successful cross-border stock exchange alliances. The exchanges in Singapore and Malaysia traded each other's securities in a competitive rivalry for many years, but this was suspended in late 1998. Cross-border alliances among derivative exchanges have again been primarily in Europe, but there are scattered examples in Asia: for example, the initiatives of the derivatives exchanges in both Australia and Singapore to forge alliances with other such exchanges. There are also moves to consolidate stock and derivatives exchanges within individual countries, such as in Australia and Singapore. The exchanges in the region need to consider whether they will be left out of the global securities markets of the future if they do not become part of the consolidation/alliance trend.
New applications of ICT no longer simply speed up the processes of trading securities and enhance market transparency, but have led to the birth of a previously unknown type of institution, the electronic communication network now being called the MONSTER (a market-oriented new system for terrifying exchange regulators). It is no longer clear what an exchange exactly is. Technology is blurring traditional boundaries and radically altering relationships, putting exchanges and other intermediaries under intense pressure. The Internet and private networks allow clients to do their own research, to look for and compare alternative intermediaries and even to trade for themselves. Fund managers now trade with the same tools as brokers, brokers hire fund managers and build trading systems to compete with exchanges, exchanges demutualize and compete with brokers for investment business. Exchanges that are using ICT solely to speed up the trading process are missing the point as global investors are not only after speed. They want more control over their own trades and access to global markets, both at lower cost. There are no space constraints in cyberspace; the physical factors that originally forced investors to use intermediaries on trading floors no longer constrain access to the trading of securities.
Exchanges and exchange regulators need to move with the developments in ICT to ensure that they continue to provide efficient and secure market places for the trading of securities and that they are paid fairly for the services and technology that they offer. There is little question that markets in the region must automate to survive. What matters most is whether they can offer competitive high-quality, low-cost services. If exchanges evolve into increasingly sophisticated computer trading systems or virtual markets that exist only electronically and cross international boundaries with ease, how then will securities regulators establish their jurisdiction to guard against manipulation and other types of fraud? The Chairman of the Federal Reserve Board in the United Statesi has stated that:
"Endeavoring to thwart technological advance and new knowledge and innovation through the erection of barriers to the spread of knowledge would, as history amply demonstrates, have large, often adverse, unintended consequences. Suppressed markets in one location would be rapidly displaced by others outside the reach of government controls and taxes. Of greater importance, risk taking, so indispensable to the creation of wealth, would undoubtedly be curbed, to the detriment of rising living standards. We cannot turn back the clock on technology - and we should not try to do so".
Rather, it should be recognized that, if it is technology that has imparted the current stress to markets, technology can also be employed to contain it.
a In a recent Financial Times information technology survey it was suggested that, as a result of the rapid pace of change in ICT, traditional financial markets were changing faster than expected but that there was still plenty of resistance to be overcome and fully online markets with no human intervention were still a few years away. See "Exchanges set for a global shake-out", Financial Times, 13 January 1999.
b Information on developments in the technologies used by and trading regulations of stock markets around the world, including those in Asia, can be found on "Andrew's Web Resources" http://www.hougie.co.uk/exchange.htm (3 February 1999).
c For more information on KSE, see the Korea Stock Exchange Web site http://www.kse.or.kr/ (2 February 1999) and "KOSCOM, digital nerve centre of KSE", Korea Herald, 23 December 1998.
d For more information on this exchange, see the Stock Exchange of Thailand Web site, http://www.set.or.th (2 February 1999).
e For more information on this exchange, see the Philippine Stock Exchange Web site, http://www.pse.com.ph/ (7 January 1999).
f For more information on this exchange, see the Kuala Lumpur Stock Exchange Web site http://www.klse.com.my/ (2 February 1999).
g See "MESDAQ expects to start trading in next six months", New Straits Times, 30 October 1998.
h S. Craig Pirrong, Derivatives Exchanges, Liquidity and Locals: A Look to the Future (Chicago, Catalyst Institute, 1994; reissued 1998).
i Alan Greenspan, "The globalization of finance", Cato Journal, winter 1998, available at http://www.cato.org/pubs/journal/cj17n3-1.html (5 February 1999).
Source: The information for this annex was provided by Ron Dale, Managing Director, Catalyst Institute, Chicago.
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