Brook Teeter, director, equities, Advanced Execution Services, Credit Suisse (Hong Kong) highlights how individual markets in Asia can be grouped from a trading perspective.
Is it helpful to think of Asia as a region from a trading perspective? Certainly each individual market has its own exchange, regulator and market practices. Strategies that work in one are not necessarily transferable to another.
Nevertheless, there are ways in which these diverse markets can be grouped to help buy-side traders from outside the region formulate appropriate expectations on how particular approaches to trading equities might play out in each instance.
The four most developed markets in the region – Japan, Hong Kong, Singapore and Australia – are relatively straightforward to trade. Their structure should be familiar to most experienced buy-side traders used to electronic trading in the US and European markets.
All of these markets can be traded short assuming the trader already has the borrow in place. While Australia has a different structure for reporting to the exchange, the major banks and brokers can handle this for their buy-side clients.
ID markets
When it comes to what are commonly called the ‘ID markets’, individual distinctions become important. Some require the broker ID to be disclosed with each order; others go further requiring the underlying investor to be identified. If buy-side institutions want to trade off their own omnibus ID they can do so, but they generally have to set up the requisite formalities either with their prime broker or through their custodian bank. Restrictions on the use of omnibus ID may apply where individual stocks have foreign ownership limits. Another option in some markets may be to leverage their current bank's ID to trade via a swap facility. This is fairly common in the Korean market, for example.
The short sell rules vary within these markets. In some cases, for example, shorts must always be done on an uptick, which makes the process more onerous.
The use of a swap facility is particularly apt where clients regularly trade and short the same stocks. In addition to facilitating short selling, this allows clients to leverage off the many different positions that are trading through the swap account.
Bid/ask spreads
The differences in the bid/ask spreads can also provide a useful indication of how likely electronic execution is to flourish in each market. India, for example, is not yet fully electronic. It is currently a ‘one touch’ DMA market, where a broker has to verify that an incoming client order meets the general conditions imposed on it prior to sending the order into the market. The spreads in India are, however, among the tightest in the region, suggesting a huge potential for electronic trading to work very well. The demand for full DMA in India is strong, according to a recent survey of delegates to TradeTech Asia. SEBI, the securities industry regulator, has indicated recently that they are looking to make it easier for investors to trade in India.
Optimism about the potential for India is based on the general observation that where spreads are narrow, algorithms work well. Japan is a case in point. On most of the names, apart from certain bank stocks, spreads are very tight and use of algorithms can add significant value. In Singapore, by contrast, the average spreads are 60-70bps, and the opportunities for effective use of algorithms are correspondingly narrower.
DMA
The acceptance by exchanges of DMA – a necessary precursor to buy-side take up of algorithmic strategies – is increasingly widespread across the region, though the distinction between one-touch and full DMA is an important one where clients are concerned about latency and potential information leakage.
The attractions of DMA to the buy-side are varied. Clients may prefer DMA for small orders that they don't want to send to a sales trader or where the idea for the trade has been generated internally. In these cases, paying full commission would be unattractive. As in the US and European markets, buyside traders are broadly keen to execute more of their flow themselves and reduce any potential for signalling, particularly when a total order exceeds average daily volume.
Research by Credit Suisse confirms that markets allowing DMA have higher turnover and lower spreads. At the same time, the trading volumes that we have been witnessing across Asia are pushing non-DMA markets to move in that direction as a way of coping with the sustained volume increases.
Malaysia provides an illustration of the impact of electronic trading, even with one-touch broker intervention. In 2005-2006, the Kuala Lumpur Stock Exchange counted 44 illiquid stocks with less than $100,000 traded value per day. In 2007, only four stocks were in that category. Malaysia has announced plans to move to straight DMA in early 2008. In the interim, Credit Suisse implemented an exchangeapproved version, called ECOS-DMA, earlier in the year. Since then, we have observed an increase in flow into that market, an increase in the number of names being traded and an increase in foreign clients trading into that market. We would expect similar developments over time in Indonesia, where DMA is in the process of being introduced.
To help traders master some of the distinctions within the region, Credit Suisse has launched AES University. Through informal seminars, clients are provided with practical information, covering anything from market microstructure and spreads to trends in the industry in algorithms and the search for liquidity. It is only through operating in and across the Asian markets, that the impact of these distinctions on trading opportunities can be fully appreciated.
