Brokers in Asia: a profile for tomorrow

Carrie Cheung, head of Pac Rim electronic trading sales at Merrill Lynch, lists the key attributes the buy-side should look for when choosing a broker.

Returns in emerging markets are considerably higher today than in developed markets, offering significant opportunities for investors to diversify and to trade globally. This is particularly the case in Asia. For instance, the S&P has returned about 1% in 2007 (plus dividend yield), while most Asian markets are recording growth rates of 40% or more. HSI is at 37%, India‘s NSE and BSE are at 40% plus, and Shanghai’s SE composite is nearing 100% return.

While capital inflows are global, trading is local. Asian markets are more heterogeneous than those in the US and Europe, with different regulations, market structures, and taxes from country to country. The heterogeneous and decentralised nature of the Asian markets makes it difficult for newcomers to grasp, but there are great opportunities for brokers to differentiate their capabilities and services based on local market knowledge and expertise.

Integrated service model
Traditionally, research, prime brokerage, stock lending, and execution services were managed in silos, with the buy-side dealing with each group individually. Recently, however, we have seen increasing demand for an integrated service model, with a single point of contact that will help identify and coordinate the seamless delivery of services to clients.

This team of experienced sales people have expertise across products and work with clients to establish investment strategies for new markets, tailor make solutions, and assemble implementation teams. They bundle products and services, including research, prime brokerage, financing, stock lending, and trading, according to client needs. This allows the buy-side to efficiently leverage a broker’s infrastructure and experience, particularly in heterogeneous markets like Asia.

Integrated execution
The most significant trend in global trading is the push toward direct market access (DMA) and algorithmic trading. Though the market for electronic trading is not as mature in Asia as in the US, it is definitely heating up. There are now more than 15 algorithmic providers, and this area is set to remain a key competitive driver among brokers in the next few years.

Choosing the right algorithmic provider and the right trading strategy is a new challenge facing buy-side firms. As well as the products themselves, other key factors are how electronic trading products should best be integrated with a buy-side trader’s desktop; how integrated they are with traditional ‘high-touch’ sales trading services; and the level of service offered through execution consulting and sales coverage.

One of the first things buy-side firms should look for is breadth and depth of the product suite – whether it provides a range of shortterm smart order routing and long-term benchmark strategies. Other questions include how much research data backs up each model, and what efforts have really been made to adapt to the local markets.

Flexibility, reliability and stability are also critical. How easy is it to tweak a strategy to your specific objectives with so many brokers offering a range of customisation options? Is the product reliable – do I always get the expected performance versus my benchmark and how stable is the system overall? These are all important questions to be answered before choosing a product.

Besides the product itself, service is critical to investigate when choosing a provider. Services refer to execution consulting or coaching. Powerful algorithmic tools are useless unless you know what they do, how they work, and when to use a particular strategy. An execution desk with experienced traders and sales traders can help buy-side firms master these tools. The desk should also provide market colour, as well as pre- and post-trade analytics like transaction cost analysis. Integrating and bundling advanced trading technology with traditional services is the key to differentiating among similar products from multiple brokers.

Finding liquidity and choosing the best venue for execution is next. Brokers’ dark pools leverage internal liquidity, provide price improvement, and minimise market impact. The latest crossing strategies, moreover, provide access to public crossing networks or to PTS. These strategies automatically scan and sweep external undisplayed liquidity pools to find liquidity at the best price and the lowest market impact. While these networks are new to Asia, you can be confident that their influence and usage will grow rapidly.

DMA is another powerful tool that allows buyside traders to take more control on orders and to guarantee anonymity. For statistical arbitrage firms and quant funds, latency is another key concern. Users should determine speed of market data, how quickly does the order reach the markets, and what level of throughput that a broker can support should also be investigated. Broker or exchange co-hosting are popular topics for clients requiring low-latency DMA solutions. All of these require significant investments in technology infrastructure, market data and exchange capacity. These are relatively common concepts in the US and Europe, however only a few brokers have the global scope to offer these in Asia.

The political and economic environment has made Asia the fastest-growing region over the past decade, and by every sign this will continue over the long term. Merrill Lynch can help guide you through the learning curve and is eager to help you tap the many opportunities for growth in this region.