Mixed results for securities trading system rehearsals

Stock Exchange of Hong Kong maintains that AMS/3 will be ready by the end of the year.
Another round of market rehearsals for the Stock Exchange of Hong Kong’s (SEHK) new trading infrastructure took place over the weekend, and grumbling is emerging from some quarters about the readiness of the system that SEHK had hoped to have operational sometime in the third quarter this year.

The new Automated Order Matching System version 3 (AMS/3) has been described in less than glowing terms by people within some of the larger brokers involved in the pilot group. Although some of this frustration might be compounded by having to deal with incomplete technology on a weekend, some are suggesting there may be a substantial delay in the roll-out of the system that will have a big impact on the way Hong Kong brokers do business.

“We’re only in the middle of market rehearsals,” says SEHK spokesperson Henry Law. “So we’re unable to comment on the success of the trials. But it’s quite normal for brokers to find some minor issues.”

Minor issues

One of the problems encountered in market rehearsals so far is with the Open Gateway (OG) device that connects the two new types of broker interface to the central host at the exchange. These two new interfaces are the SEHK-supplied MultiWork Stations (MWS) and the Broker Supplied Solutions (BSS), which are systems usually designed by third party software vendors contracted by brokers. In the pilot group there are 10 MWS and 41 BSS.

Some people involved in the tests say there are problems with the speed of trades, and orders getting lost. These problems could be caused by either the OG itself, or the way that third party vendors have programmed their BSS to integrate with it. Either way, the problems will effect the launch of the AMS/3 system because all members of the pilot group have to prove that they are ready before the exchange switches over to the new system, an event they refer to as Day 0.

When Day 0 does arrive, trading will begin using only the AMS/3 terminals at all licensed brokers in Hong Kong. And on this front, things seems to be going pretty smoothly. The old AMS/2 terminals have all been upgraded and brokers report that they operate at least as well as the old ones. But enhanced features of the AMS/3 system, such as multiple market access and new order types, won’t be available until up to two months after Day 0.

The Order Routing System (ORS) that the exchange is supplying to enable all brokers to use the internet and mobile devices for taking orders will be rolled out, depending on market needs, sometime around three months after AMS/3’s launch. But those brokers in the pilot group with BSS should be able to deliver much faster online trading as soon as three weeks after launch. Brokers outside the pilot group will start trading with the new MWS and/or BSS interfaces in batches staggered over the months after launch.

With the current securites trading infrastructure in Hong Kong, 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 results in much faster trades for investors using online trading services, and brokers expect that this will influence the number of online traders in Hong Kong and thus reduce costs.

Time after time

Many people are beginning to notice a similarity between the rollout of the new AMS/3 infrastructure and what happened with the final migration of futures and options trading to the Hong Kong Futures Automated Trading System (HKATS) in June this year. Originally slated for  completion by June 1999, that project concluded 12 months later after several deadline shifts and exhaustive testing that tried the patience of market participants.

But Law says there is no comparison. “The two systems are very different in every respect – the capacity, the penetration, the network,” he says.

The Stock Exchange of Hong Kong originally told market participants last year to “expect AMS/3 to begin operation in mid 2000”. Later communications said that roll-out of the MWS and OG would occur in the third quarter. It now seems likely, if market rehearsals continue to have unsatisfactory results, that roll-out will begin sometime in the fourth quarter. SEHK is now pointing to the listing document of its parent company, Hong Kong Exchanges and Clearing, which states that AMS/3 will be launched before the end of the year. That is, of course, if the market rehearsals don't drag on for another 14 weekends.