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Alex Lo

The much-maligned Science Park has long been criticised as a white elephant, accused of offering subsided office space for private companies that have little or nothing to do with science and technology. 
Now the park may have hit the jackpot,  thanks to a hi-tech project with the stock exchange that is not only cutting edge, but also potentially enormously profitable for everyone involved. The catch is - it may be a pact with the devil.  
Hong Kong Exchanges & Clearing  has acquired from the park an 11,000 square metre site at Tseung Kwan O Industrial Estate  for a price of just HK$26 million. 
Here, the next-generation data centre will be built to handle the exchange's securities and derivatives markets as well as serving as a hub for the settlement, hosting and clearing of all orders. The state-of-the-art computer science involved will rival or exceed any computing infrastructure now available in Hong Kong or elsewhere in  southern China. 
But what is really driving the need to build such a high-powered data hub? The simple answer is: high-frequency trading (HFT). 
And that's the catch. 
The controversial use of automated trading programs has been blamed for contributing to the 'flash crash' in May in which the Dow Jones Industrial Average  dropped about 600 points in minutes. Critics say the practice contributes little or nothing to the functioning of capital markets, while making them more volatile and unstable; it also makes it easier for practitioners to manipulate markets and game the system. 
HFT advocates, however, say it increases liquidity, speeds up price discovery, narrows the spread between the bid and offer prices, and lowers trading costs. These surely benefit everyone, they claim. Some even argue that HFT helped markets recover quickly during the flash crash. Even among academics, there is no consensus on whether HFT is good or bad for the market. 
HFT enables buy and sell orders to be executed dozens of times in the blink of an eye. There are many strategies. Perhaps the simplest is to exploit tiny differences in the bid and offer prices - the spread. Such programs take an insignificant slice of profit each time, but the slices added  can amount to serious money. 
On the Nasdaq, HFT traders get a peek at  prices about 30 milliseconds  before everyone else, enough for their computers to guess which stocks may soon be in high demand. 
The trading system's runaway growth has meant that up to more than half of all trades in the US and the largest European equity markets are now done by such computer programs. What is perhaps most disconcerting is that they automatically execute orders long before  any trader can even process the information. 
Asia has been slower to catch on. And that is one reason the Hong Kong exchange is keen to jump on the HFT bandwagon. Similar computing initiatives have been launched by the exchanges in India, Singapore and Australia. 
Chris Tam, head of trading and operations at Future Gate Capital Management (Asia),  said the Hong Kong stock exchange project would attract more funds into the city. 
'Right now, after the financial crisis, there's a lot of liquidity flowing to Asia, where investors are beginning to see the benefits of putting in capital to develop the infrastructure [for HFT],' said Tam, whose firm manages HFT funds for asset managers. 
For the Hong Kong exchange, higher trade volumes mean more settlements, which means more revenue. And what can better quickly increase trading volumes by a significant order of magnitude than HFT? 
Because of the controversy surrounding HFT, the exchange and the Science Park prefer to emphasise the computing advances to be achieved at the hub - scheduled for completion in mid-2013 and costing about HK$1 billion, paid for by the exchange - rather than its capacity to handle HFT. 
An exchange spokesman said it made sense to centralise all the data services now provided by several data centres across the city. But he admits 'co-location' is also a key factor. The term refers to the shortening of time that computers need to communicate with each other if they are physically close.
By having all its computers in one place, not only will the exchange's systems work faster and more efficiently, but commercial traders can also place their own systems closer to the exchange's, thereby saving microseconds -  in HFT, every microsecond counts. 
HFT has been around for several years, but it is only recently that it has built up to such high volumes in major Western markets. 
Crowding and competition - when everyone is using  similar strategies - has cut into profit, and that is one reason HFT traders are migrating to Asia. And now, they are coming to a stock exchange near you. 
Additional reporting by Amanda Lee
High volume
HFT firms represent 2% of the 20,000 US financial firms, but account for this percentage of equity trading volume: 73%
High cost
The amount, in Hong Kong dollars, to be spent by HKEx to build a new data hub that can handle HFT: $1b
Quick time
The lead time, in milliseconds, in which a high-frequency trader on the Nasdaq gets to see a price before everyone else: 30



The data jackpot, or a deal with the devil?