The Hong Kong Stock Exchange (SEHK) has been eagerly awaiting the launch of the third version of its Automatic Order Matching and Execution System 3 (AMS/3), scheduled for the third quarter this year. But some analysts believe the system may now not only be delayed, it will offer only a few of its eventual features when it is first rolled out.
AMS/3 is intended to help the exchange catch up technologically with Asia's other developed markets. Korea and Singapore, for example, have had automated exchanges with direct order routing for years. New channels and workstations will be introduced in the first phase of implemetation, but AMS/3 will eventually offer such advanced features as multiple market access, new order types and trading methods, although the schedule for this is far from clear. SEHK originally intended to launch the new system by mid 2000, but it extended the deadline in March once user training got underway.
Testing stage
Network testing was completed in mid June, and all existing AMS/2 off-floor terminals have now switched over to the new system for production. The exchange says the AMS/3 launch date now depends on the results of the installation of the host system and market rehearsals, which will take place some time in the third quarter.
A source at Hong Kong Telecom, which is responsible for developing many of the system's components, says that if there is any delay past September, it will more likely be because brokers themselves aren't prepared. But even if the brokers are ready, they won't be getting the full benefits of AMS/3 right away.
The first features
The main structural difference between the existing AMS/2 system and AMS/3 is the introduction of new types of workstations and channels in addition to the old on-floor/off-floor terminal set up. Existing terminals will be updated to AMS/3 at SEHK's expense, but brokers also have the choice of two new workstation systems that will connect to the AMS/3 trading host (the central server at the SEHK) via an open gateway (OG) device.
The system developed by the exchange is known as Multi-Workstation System (MWS) and allows up to eight workstations to be connected to an MWS server, which in turn connects through the OG to the trading host. But many brokers have chosen systems developed by in-house teams or third-party vendors. These are referred to as Broker Supplied Systems (BSS), and the number of workstations they can support depends on their design. The BSS in the pilot group are undergoing compliance testing, which the exchange expects to complete by mid July.
Advanced features
The two OG systems - and to a lesser degree the terminals - will allow new trading methods and order types. These won't be introduced at launch, but they should one day allow brokers to place new order types: enhanced limit order, special limit order, average value order, at auction order and auction limit order.
New trading methods will also be introduced that add to the traditional automatching method. SEHK says single price auction and market making methods will eventually facilitate the launching of new investment products. Again, no date has been set for implementation.
Will ORS be ready too?
The new investor access channels will redefine the way brokers in Hong Kong do business. Here again, the exchange is developing its own solution for brokers. The Order Routing System (ORS) is being designed to automatically route investors' trading requests to brokers for approval and submission to the market. The requests can be made using any online device (such as the internet, mobile phone, PDA) through either the channels maintained by the exchange, or third-party trading networks. The orders will be authenticated by the ORS, or third-party network, before being routed to the investor's broker for approval.
Brokers also have the option of making their own arrangements for proprietary channels that interface with their BSS workstations. Many of the larger brokers are pursuing this strategy and trying to incorporate online trading in Hong Kong with their online trading activities in other markets.
Under the current AMS/2 system, any incoming order - whether it is via phone, internet or WAP - has to be re-keyed manually by a broker into a terminal. But the AMS/3 system supports straight-through processing. Brokers can either check and submit trades manually, or set a criteria for automatic approval and submission of orders to market. This is likely to have a big impact in Hong Kong, where there are only eight online trading ventures. With a huge retail investor market, high internet penetration and commissions likely to be deregulated soon, the competition for a stake of the online market will heat up towards the end of the year.
The exchange is yet to make an announcement about when the ORS will go live, but some analysts and brokers expect that it might be later than September. If this is true brokers hoping to get first mover advantage in the straight-through processing of online trades will have to rely on their own proprietary channels.
