(Bloomberg) — For international investors accustomed to speed, trading in Chinas stock market is like flying blind.
Thats because everybody who transacts on the Shanghai Stock Exchange gets price updates just once every three seconds, or five seconds if they have a lower level of service.
While the gaps have gone largely unnoticed by individual investors who make up more than 80 percent of volume, theyre presenting a problem for overseas traders — many of whom just recently gained access to Chinese shares through the Shanghai- Hong Kong Exchange link.
Lack of continuous pricing prevents investors from using strategies that rely on speed and precision, a hurdle thats gotten even bigger in recent weeks as volatility in Chinese shares climbed to the most extreme levels worldwide. As the country seeks to raise the profile of its equity markets on the global stage and gain acceptance into MSCI Inc. indexes, UBS Group AG says getting prices in three-second snapshots is one of its biggest concerns.
The gap makes it very difficult for anyone to trade as the data is stale by the time it hits, said Joel Hurewitz, the global head of broker-dealer strategy at Nomura Holdings Inc.s Instinet Pacific unit in Hong Kong.
Arbitrage Bets
Most developed markets stream continuous share prices to meet the needs of professional investors, who increasingly use fast-moving computer algorithms to buy and sell. As prices move between snapshots, investors in China are left in the dark.
That is actually one of our biggest concerns, specifically in the electronic trading space with respect to the ability to read, acknowledge, and analyze data, said David Rabinowitz, the head of direct execution for Asian equities at UBS.
For arbitragers seeking to exploit short-term price differences between dual-listed shares in Shanghai and Hong Kong, the gaps make it difficult to square essentially real-time prices in Hong Kong with the relatively stale information from China.
Even if you have a fast network between Shanghai and Hong Kong, the market data coming from China and sent overseas is based on snapshots, said Alex Godingen, the head of business development in Asia Pacific at Fidessa Group Plc. This creates a processing delay, he said.
Shanghais bourse has to weigh the costs of distributing large amounts of data against the benefits of continuous pricing, according to China Investment Information Services Ltd., a Hong Kong-based unit of the Shanghai Stock Exchange that manages the flow of data from China to Hong Kong. Volumes in Shanghai have surged to all-time highs this year after a record- long bull market in the benchmark index gave way to the biggest rout since 1996.
Combining Feeds
Real-time streaming data consumes large bandwidth, Man Leung, an assistant manager at CIIS, wrote in an e-mail. We have to balance the information and bandwidth requirements.
Vendors are expanding bandwidth from China, while Hong Kong banks and brokers are finding ways to adapt. Interactive Data Corp., which disseminates data from the Shanghai exchange, plans to further increase capacity after recently doubling it, said Levent Mehmet, a vice president for trading solutions in Asia Pacific at the company.
Different vendors receive snapshots from Shanghai at different moments, so combining feeds from several sources improves the overview of the market, said Stephane Loiseau, head of cash equities and global execution in Asia-Pacific at Societe Generale SA. Traders can also send multiple orders to the Shanghai bourse to discover prices when they need to trade between updates.
As the sophistication of trading strategies increases, speed and latency become a major factor, Loiseau said. Availability of fast market-data feeds is key.
