Ready SET Go!: A Strong Start for the Thai Stock Exchange

As I reviewed the Thai Stock Exchange (SET) 2011 Annual Report on-line, the first words that caught my attention were “Driving to Success”. These three words encapsulate a view that I have developed regarding the SET over the last year. Although the Exchange has faced overseas economic challenges, a flood in Bangkok and domestic political stress, it has a clear agenda and is driving forward in its efforts to expand its capital market both within Thailand and beyond its borders.

Among the many successes achieved this year, I want to focus on three key developments: trading technology, new product launches and post-trade services.

Like many exchanges in the region, Thailand is in the midst of a technology overhaul. After approximately a year of preparation, the securities trading engine is scheduled to launch this month. The new platform uses Cinnober’s TRADExpress trading system and provides better transaction speeds to support high frequency and algorithmic trading. Algorithmic trading is allowed in Thailand once a firm has been approved by the SET. Currently, volume is low representing about 3-4% of equity trading flow. Furthermore, these changes will position the Exchange to handle multi-asset trading.

Along with the technology changes, the overall initiative focuses on improving operational efficiencies and market surveillance. In July, the Exchange announced revisions to their trading rules involving changes to these functions: adjustments to floor and ceiling prices for IPOs, improvements to the calculation of opening and closing prices, adding new categories of market orders, and providing the ability to do order amendments prior to execution.

The technology upgrade will not only help boost overall trading activity and market liquidity but will also make it easier for the SET to launch new products and facilitate cross border trading due to the introduction of standard industry interfaces.

On the product front, the Thailand Futures Exchange (TFEX) launched US dollar futures following approval by the Ministry of Finance. So far, volume has been consistently low averaging about 4,400 contracts per day. For the first time, Thai residents can manage USD exposure without underlying exchange risk, however, it may take some time for the new product to settle in, as it is such a significant structural change to current practices. The introduction of sector index futures on the TFEX is on the product roadmap for later this year.

Thailand has also been concentrating its efforts on improving their post-trade services. The SET has been working with Oliver Wyman on a four-phase operations master plan to be completed in 2016: Phase One focuses on strengthening risk management; Phase Two on expanding member access to new products and services by improving clearing and settlement systems with the support of The Korea Exchange (KRX). KRX was recently selected by the SET’s board to help develop Thailand’s clearing and settlement system across all products. Phase Three will focus on optimizing operational efficiencies across the trading life cycle and Phase Four on diversifying into new product areas once the infrastructure is in place. The overreaching objectives behind the plan are to enhance the competitiveness of the Thai markets and make Thailand a more attractive partner for global collaborations.

The SET has done a good job at managing the issues within their control. However, there are still some fundamental capital market structure issues that need to be addressed. For example, currency and foreign ownership restrictions need to be relaxed and better aligned with international standards and Thailand needs to sell off some of its state assets. In November 2009, the Securities and Exchange Commission (SEC) formalized and submitted to the government its proposed capital market framework in a document called the “Capital Development Plan”. This document sets out proposals to further open the Thai market, supports plans to de-mutualize the Exchange and introduces alternative venues to compete in the local market. Parliament has reviewed the document twice and rejected it perhaps because it proposed far too many changes at one time.

So, despite all of the SET’s progress, its future is in the hands of politicians. Only time will tell whether they will recognize the country’s potential and do what is necessary to elevate Thailand to the position of a respected and recognized member of the global investment community.

Written by Donna Bales, Founder of Balmoral Advisory

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About The Author

Donna Bales
is a product development professional with a proven track record of managing complex capital market industry initiatives during times of significant market change and market structure reform. Donna is the founder of Balmoral Advisory, a boutique advisory firm that works with exchanges, regulators, technology firms, market participants and market data vendors to identify and evaluate business opportunities, understand and respond to changing industry/market dynamics and develop and implement strategies and solutions that make sense now and in the future. In addition she acts as a strategic advisor to an international consultancy firm, CollegeHill Asia and sits on the Board of 3Q Innovation, a non-profit that focuses on retraining and replacement of older workers following protracted unemployment. Originally from Canada, Donna holds a bachelor degree in Economics from the University of Western Ontario.