SGX: What is the elephant?

I will borrow a favorite question from a blogger here, ‘Why did the chicken cross the road?’ To find out what is an elephant. I have several questions that I would like to ask, not expecting an answer from the SGX, so better address them to MAS and to Heng Swee Kiat better still. Hopefully then people will see the light.

How much does it cost a fund to set up an operation here to trade using super computers? Initial cost of $50m to $100m and an annual overhead of $30m? How much would be the returns for such an operation to be profitable and sustainable? I reckon a return of $50m per annum would be the bottom line. Could such an operation deriving profits from skimming arbitrages and front running on inefficiencies in the market make this kind of money and be worth the high set up and operating cost? Why would computer traders invest so much capital and overheads to make a few dollars? Cannot be right? How many of such computer traders are here with their super computers plugged into the SGX system to feed on live data to trade against the rest of the innocent investors?

Assuming there are 10 such computer operators, could be 20 or more, with each expecting a return of $50m annually to justify the cost of investment, it would mean they would have to scoop up $500m from the market. This cannot be achieved by just arbitraging or front running. What other advantages did the computer traders have over the other traders to be able to rake in millions in guaranteed profits and not reveal to the public? What about information like keying into the system to tell the super computers that someone is shorting? Would the supercomputers be computing on how to take advantage of such information to make profits?

The computers are having price sensitive information, like who buys what or sells what at what price and at what volumes that ordinary investors did not have. Isn’t this insider trading? Isn’t this front running? Aren’t these a violation of SGX’s principle of providing a level playing field for fair trading? Are these acttivities criminal?

Now what would I like to ask Heng Swee Kiat and the MAS?

1.     How many super computers are plugged into the SGX trading system?

2.     What are they doing, what price sensitive information the computer traders would have that other investors did not have?

3.     Are computer traders, with their access to the SGX system and data and trading to profit from such information a violation of SGX trading rules and regulations and a crime?

4.     What are the records of the profits of the computer traders

5.     Would MAS/Heng Swee Kiat ask SGX to explain to the public/investors how the super computers work, the live data they are mining from the SGX system and how are these used to profit from the system? If the computers are not plugged into the SGX system, if the computers are operating independently within the premises of computer traders, they have all the rights to confidentiality of their computers. But the computers are now plugged into the SGX to take advantage of the system, their operations cannot be confidential anymore. There is a need for more transparency to see if there are cheating the system and the investors. The public/investors have all the rights to know what they are up against. It is only fair.

I hope these questions can be brought to the Remisiers Society and to the attention of MAS and Heng Swee Kiat. Make these questions public, get the media to raise it for public awareness and to educate the public on what is going on and whether there is any violation of the SGX’s trading rules and regulation, whether it is criminal to begin with.

Get the elephant out of the system if you want a fair system, a level playing field.