Hedge Fund That Made 56% in FX Backs New Trading Platform

(Bloomberg) -- The $5.1 trillion-a-day foreign exchange market’s newest upstart trading venue has big ambitions to bring more of the world’s currency transactions to Asia. It also has some big-name backers.

Singapore-based Spark Systems will start a live trial of its currency platform in March, hoping to lure traders with lower fees than existing offerings in the city. The firm won financial support from Singapore’s central bank and is part-owned by Dymon Asia Capital, the $5.5 billion investment manager whose currency hedge fund returned 56 percent last year.

Spark is counting on prominent patrons to help it break into a foreign-exchange market long dominated by major Western financial firms. Its goal is to create a venue for Asia-based institutional investors to trade with each other in Singapore, instead of routing orders to London or New York, according to Chief Executive Officer Wong Joo Seng. While Singapore’s share of currency transactions has climbed in recent years, the city is still a distant third in the global rankings -- a gap that both the central bank and regional money managers are keen to narrow.

“It would be a big advantage if the liquidity pool improved,” said Ashvin Murthy, who runs the AVM Global Opportunity Fund in Singapore and has been trading currencies for a decade.

Wong, 53, has been a fixture in the Singapore financial scene for three decades, running local brokerage G.K. Goh Financial Services Pte from 1998 until 2014. He also co-founded M-DAQ Private Ltd., which developed technology for exchanges to price stocks in foreign currencies and is now backed by Alibaba Group Holding Ltd.’s Ant Financial. At Spark, Wong is joined by Chief Technology Officer Ye Ting Song, who helped build currency trading systems at Barclays Plc and Pine River Capital Management in Hong Kong.

Central Bank Support

Dymon owns more than a third of Spark through its venture capital fund and is prepared to dilute its holding over time to allay potential client concerns over neutrality and confidentiality, according to Jinesh Patel, who runs Dymon’s VC arm. The hedge fund agreed to be the platform’s first user and has asked some of its counterparties, including banks and other liquidity providers, to join it, according to Wong.

“As an active participant in the foreign-exchange market, Dymon is always interested in working with various players in the ecosystem to improve liquidity, pricing, transparency and efficiency,” said Gerald Chan, head of distribution at Dymon.

The Monetary Authority of Singapore said its support for Spark is part of a S$225 million ($159 million) plan to fund technology and innovation in the financial industry, while declining to disclose the size of Spark’s grant. The startup has also raised $6.5 million from investors including Singapore-based Vickers Venture Partners, Wong said.

Bloomberg News is owned by Bloomberg LP, which also operates FXGO, an electronic trading platform for foreign exchange and commodities over the Bloomberg Terminal.

Tough Odds

Spark’s prospects will depend on its ability to convince major traders to use its platform, according to Javier Paz, a senior analyst at Boston-based research firm Aite Group.

“The likelihood of success is not very high for firms that don’t already have a lot of liquidity behind them,” Paz said. “The institutional buy side prefers to deal with large, well established players.”

Singapore already has currency trading platforms with servers in the city, according to Clement Goh, managing director for South Asia at Equinix Inc., the world’s largest provider of interconnected data centers.

Spark aims to differentiate itself by charging lower fees than competitors. It will cost $3 or less for every $1 million worth of trades on Spark’s platform, versus $5 to $15 for existing venues, Wong said. He also wants to attract speed-sensitive traders, some of whom currently send orders offshore. Wong says it takes about 2 milliseconds to match an order in Singapore, versus 200 milliseconds to route it to New York or London.

The U.S. and U.K. handled about 56 percent of the world’s currency trades in 2016, compared with about 8 percent for Singapore, according to the Bank for International Settlements. Daily transactions in global currencies have shrunk almost 6 percent since 2013 as post-2008 crisis regulations prompted international investment banks to pull back from dealing, BIS data show. Electronic traders, meanwhile, have taken a bigger share of the market.

Keith Dack, a senior portfolio manager at Kit Trading Fund in Singapore, said he’s in favor of any venue that helps improve liquidity in the region. From the Brexit referendum last June to the pound’s flash crash four months later and similar episodes in Indonesia and Malaysia in recent months, traders have faced bouts of extreme volatility during Asian trading hours. Dack, who has more than 30 years of experience, said he missed out on more than 20 trades after Brexit because prices had moved before the orders were executed.

Whether or not Spark’s platform offers a solution, only time will tell.

--With assistance from Lulu Yilun Chen and Sam Mamudi To contact the reporters on this story: Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net, Netty Ismail in Singapore at nismail3@bloomberg.net, Klaus Wille in Singapore at kwille@bloomberg.net. To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Michael Patterson