Support grows for direct action

The Securities Exchange Board of India (SEBI) announced in April that it plans to allow brokers to offer DMA to institutional investors for the first time. Until now, the Indian authorities have only permitted one-touch DMA, with clients forced to place orders with a broker for trade execution. Is one-touch DMA an anachronism that’s had its day?

Richard McClure

The move towards fully automated electronic trading, which has expanded into all asset classes in recent years, has provided the buyside with the opportunity to seek greater control of the trading process. At the simplest level, direct market access (DMA) is remote access to a broker’s trading tools. DMA is a way for buy-side institutions to access liquidity venues and directly execute their buy and sell orders without any manual intervention by their brokers, though the sell-side isn’t entirely out of the picture because the trades are still executed through their systems.

The advantage of DMA is greater transparency and increased liquidity. Demand is also driven by cost savings (transaction costs are lower by up to 75%), anonymity in the market, and gaining an edge in speed of execution by not going through a broker’s order infrastructure. Foremost, however, clients seek to have direct control over their orders. “DMA allows us to represent ourselves in the market,” explains Kevin Chapman, managing director and head of trading, Nicholas Applegate Capital Management. “There are a lot of different ways we can do that, and we can use multiple vendor products, but whatever products we choose, it’s all about the trader being in control of the order.”

Although DMA is expected to gain particular traction in Europe following the proliferation of multiple pools of liquidity now being established on the back of MiFID, it is a rather different picture in Asia. Here, the availability of DMA varies from market to market. “There are two areas that differentiate DMA in certain Asian markets from other Asian markets. The first is regulatory and public policy mechanisms; the second is really a capacity issue,” says Gabriel Butler, director, sales and trading, ITG.

Each of the countries that make up the Asia region has a unique set of requirements, regulations, market structures and local practices that all have an impact on how DMA, and electronic trading generally, can be used.

Currently, DMA is allowed in Japan, Korea, Taiwan, Hong Kong, Singapore, Thailand, Indonesia, New Zealand and Australia. “The Australian Stock Exchange has been accessible via DMA for a number of years now,” says David Stocken, senior product manager, equity products, Australian Stock Exchange (ASX). “All of the institutional brokers who are ASX participants offer DMA execution into ASX.” The average daily turnover on ASX is currently around A$6 billion, with electronic execution onto the exchange (both DMA and algorithmic execution) estimated to account for approximately 25-30% of this turnover by value.

Pause in proceedings
Other markets, however, are not nearly as advanced as Australia. Rather than the provision of straightthrough DMA, varying versions are offered instead. India, for example, is not yet fully electronic, and is defined as a ‘one-touch’ DMA market.

One-touch DMA involves the buy-side sending a client order to the sell-side, but with the order stopped on the desk to be acknowledged, with the broker required to verify that the order meets the general conditions imposed on it prior to sending the order into the market. “Straight DMA is the direct routing of an order into the matching engine, that is, with no touch execution,’ explains Stocken. “Whereas one-touch DMA is order routing where there is a pause which requires the broker to key or re-key all final placement of those orders into an exchange’s matching engine.”

The development of one-touch DMA in Asia has come about for a variety of reasons, says Christian Chan, head of electronic trading, Asia, Instinet. “Factors include limitations of exchange systems, compliance and surveillance requirements, and in some cases, even protectionism,” he notes.

But what actually constitutes one-touch DMA from a regulatory perspective? “Is it just that a sales trader looks at the order and approves it?” asks Hani Shalabi, executive director, direct execution, sales, UBS. “If so, what are they meant to be approving? Whether it looks like a good trade or bad trade; is it too big or too small?”

Shalabi also questions whether brokers that implement one-touch in an automated fashion are in effect circumventing regulatory rules. “Is it simply a pause?” he asks. “UBS’s one-touch DMA is a one-touch – there is a physical human being pressing a button, otherwise our compliance would never allow it to be called one-touch.”

Some Asian markets, particularly Taiwan, Thailand and India, are stifled by these regulatory hurdles in offering DMA. In all these countries, the SEC (local regulatory authority) has viewed DMA and electronic trading as something that introduces unwanted volatility in the market. “Electronic trading in general has also lagged in Asia in comparison to Europe and the US because the client demand was not there,” adds Instinet’s Chan.

Is one-touch enough?

 But is one-touch a help or a hindrance in the struggle to improve trading efficiency? Certainly it is an improvement on the previous scenarios, where all orders needed to be punched in manually at brokerages, resulting in considerable delay in the execution of orders, the subsequent loss of many arbitrage opportunities, plus an increased risk of front running. “One-touch is a great help in Asia,” says Chapman of Nicholas Applegate. “Although it does take one touch, it is moving in the right direction. It’s important for our efficiency.”

Although straight DMA aims to achieve even faster execution by eliminating any mandatory order rekeying and going straight to the execution phase, onetouch DMA does at least achieve faster execution for clients than the old-fashioned over-the-phone order placement. “All DMA helps increase trading efficiency by way of faster execution and less slippage,” says Stocken of ASX. “One-touch is an improvement on oldstyle over the phone execution, although straight DMA is even more efficient.”

“If you think rationally about it, what’s the difference if it [one-touch DMA] adds one or two seconds of latency to what is already a fairly quick process,” says Mark Northwood, head of dealing at Fidelity International in Hong Kong. “It’s certainly quicker than calling someone up,” he adds. “It’s a myth to think that electronic trading has no human intervention. There are teams of people who are watching electronic trades flow through every broker. We need someone to call if we have a problem and they need someone to call if they see a problem. Onetouch DMA is not a huge step away from that,” he concludes.

However, one touch obviously requires a broker to take the time to acknowledge the order, a process which can add latency to the trading lifecycle. Also, in markets where regulators require brokers to check the client’s account for cash and holdings, this can lead to the buy-side losing anonymity because the order goes to the desk of the broker, then to the exchange.

According to UBS’s Shalabi, these two issues bring major disadvantages. “Speed is a big issue,” he says. “You can’t be firing off orders on a one-touch system because no one is going to be able to release them fast enough.” This could be of particular concern to those traders who want their orders to arrive immediately. “In a fast-moving stock, 10 seconds could be a lot.”

Secondly, with the order stopping at a broker and a sales trader looking at it, this prevents it becoming anonymous flow. “One of the big advantages of DMA is that no one knows what you are doing, but if a sales trader is actually approving the client order then clearly you have lost your anonymity in that market,” says Shalabi.

Instinet’s Chan agrees that one-touch is “certainly not as efficient” as full DMA. But despite what he calls the “frustration” of the trading method, he believes it is a “useful interim step between manual trading and full DMA, given the modifications required to the exchanges, compliance infrastructures, et cetera that must take place.”

Pure DMA
Indeed, the acceptance by exchanges of DMA is increasingly widespread across the region. Anecdotal evidence and numerous analyst reports are now indicating that Asia is rapidly closing the gap with institutional clients around the world turning to Asia for alpha and expecting a comparable trading infrastructure. “Pure DMA is already a reality in many Asian markets and it is only a matter of time before the rest are there as well,” observes Chan.

His view is supported by the announcement in April that India’s market regulator, the Securities Exchange Board of India (SEBI), will allow brokers to offer DMA to their institutional investors for the first time. Until now, India has only offered one-touch DMA, with clients having to place orders with the brokers to execute the trade.

Brokers interested in providing DMA will have to apply to their stock exchanges and will be responsible and liable for all orders routed through this system, with the regulator reviewing the working of the system after six months of its introduction. “There is a tremendous eagerness in Asia to get into electronic trading,’ says Gabriel Butler of ITG. “Demand is high. People are waiting for these services to be provided in an efficient manner.”

Progress in this field can be attributed partly to a number of global brokers, which are working with the market authorities across the region to help introduce DMA platforms. Instinet, for example, has operated in Asia since 1994 and was among the first brokers to offer electronic capabilities in the region. “Because of this, we have some pretty deep relationships with the regulatory bodies and exchanges that need to adapt to pave the way for full DMA,” says Chan. “We have been able to act as an advisor of sorts to these groups, so that hopefully, the perspective of everyone – buy-side, sell-side and the incumbent exchanges – is taken into account as Asia moves forward.”

Likewise, Credit Suisse also has a long-standing presence in Asia. “We have been working very hard with the regulators and exchanges to help implement DMA and algorithms in all of the markets in Asia,” says Brook Teeter, director, equities, advanced execution services, Credit Suisse, Hong Kong. “In fact, we were the first broker to provide DMA in Thailand and Malaysia.”

Rush to remain competitive
Like India, Malaysia is currently in the process of introducing full DMA, implemented on the back of Bursa Trade, the exchange’s integrated trading system for derivatives and equities. The equities portion of Bursa Trade was expected to be completed as The TRADE went to press. In the interim, Credit Suisse implemented an exchange-approved version, called ECOS-DMA, which has resulted in greater flow into the market, an increase in the number of names being traded, and more foreign clients trading.

“Full DMA will change the trading landscape of the Malaysian capital market,” predicts Yusli Mohamed Yusoff, CEO, Bursa Malaysia. “By automating the trade order process, DMA provides investors with greater control over trading execution and strategies. It is essential for the Malaysian capital market to remain competitive in the global investment arena.”

The rush to remain competitive is driven by investor preferences, which are increasingly aligned to more efficient markets where trades are fully electronic. Teeter at Credit Suisse predicts that all of the markets with exchanges that are electronic will allow DMA in the next year or two. “These will include markets such as the Philippines and Pakistan,” he foresees.

The global demand for improved execution efficiency is “very high”, adds Stocken at ASX, who suggests that slower Asian development of DMA is simply part of the natural evolution. “DMA execution began in North America and Europe, whose markets and exchanges are more homogeneous. Asian markets and exchanges are more differentiated in their structure,” he says. “Therefore a broker’s DMA execution offering may require significant work to interact with the differing structures of every Asian exchange.” As buy-side dealers grow to become more comfortable with straight DMA, he adds, it will develop rapidly across Asian markets over the next few years.

“There are not really that many people trading DMA in Asia in terms of percentages, so there is a lot of room for growth,” agrees Greg Treacy, president, NeoNet, USA. “We see it becoming more like the US model. We expanded into Asia last year and we will add more markets here this year as well. We are pretty bullish about DMA in the region.”