Trading volumes on Asian exchanges could soar by 20-30% per annum in coming years, but market evolution will remain slow because of exchange concentration and regulatory protectionism, according to a study from research group Celent.
The report, ‘The Evolution of Equities Market Structure in Asia-Pacific’, predicts that Australian and Japanese markets are likely to undergo the greatest changes. The Tokyo Stock Exchange (TSE) launched Arrowhead, its next generation trading platform, at the beginning of this year, and rival proprietary trading systems (PTSs) will be able to clear trades using domestic central counterparty Japan Securities Clearing Corporation from July 2010. Regulatory body the Australian Securities and Investments Commission (ASIC) is gearing up to take responsibility for market supervision from the Australian Securities Exchange (ASX) in Q3 this year, a move that is widely expected to allow alternative trading venues such as Chi-X and AXE-ECN to start trading in the country.
These changes, claim the report, are likely to increase the adoption of high-frequency trading strategies in both Japan and Australia. Furthermore, the report expects liquidity on Japanese PTSs to increase to 6% by 2012. According to data vendor Thomson Reuters Asian Market Share reporter, the TSE accounted for 94.9% of trading in January, a marginal decrease from the 95.02% share it had in December.
“The markets most likely to see the greatest change in 2010 and 2011 are Japan and Australia, due to significant reforms of market structure,” said Chermaine Lee, Celent analyst and co-author of the report. “Advanced trading strategies should expand in Australia in 2010-2011. ATS market share should also grow in both of these markets.”
The study also expects Singapore to maintain its hedge fund-friendly status over the next few years and but suggests that Hong Kong will take some time to develop a fully electronic market infrastructure to rival global leaders, despite an recently upgraded trading platform and a new CEO at the Hong Kong Exchange. Electronic trading is predicted to account for a larger proportion of buy-side flow, including 20-35% via direct market access and algorithmic trading rates of 30-50% across the more developed markets of Australia, Hong Kong, Japan and Singapore.
According to Celent, uneven progress across markets in Asia, combined with regulatory impediments and the lack of a unifying catalyst to help drive region-wide directives, like RegNMS in the US and MiFID in Europe, will limit market evolution.
Nevertheless, international buy- and sell-side firms are likely to lead technology innovation in Asia, spurring regional players to follow suit to catch up.
“Increases in buy-side trading sophistication will gradually support advanced trading strategies, including some high-frequency trading,” added Neil Katkov, senior vice president of Celent’s Asia research group and co-author of the report. “Greater utilisation of advanced order types and trading tools like algorithms and smart order routing will expand in the region, but certainly not to the extent of US and European markets.”