As 2010 gives way to 2011, buy-side trading firms can look back at a year characterised by sweeping change across Asia's equities markets. New platforms have been launched, new regulations passed and new markets opened up. Technology too has taken several steps forward over the last 12 months to link together Asia's emerging trading landscape.
The opening moves of 2010 were made in Japan, where the incumbent Tokyo Stock Exchange (TSE) introduced its new low-latency trading platform on 4 January. Widely considered a game-changing event, some market participants view Arrowhead as the most important occurrence in Asia this year.
Astonishing Arrowhead
Jon Evans, head of equity trading, Japan for buy-side firm J.P. Morgan Asset Management, says the “astonishing success” of Arrowhead has transformed trading in Tokyo. “In comparison, the alternative venues look like also-rans. The TSE is now so much faster and the spreads are so much narrower,” he comments.
Arrowhead cut the TSE's order response time to five milliseconds and data distribution to three milliseconds. The system also increased the exchange's order capacity from 28 million to 46 million. The new platform was introduced partly to counter the threat of competition from other venues, such as proprietary trading system (PTS) Chi-X Japan, which launched in July.
The growth in Japan of ”off-exchange' trading during Q4 to over 10% of the market – a tenfold increase from the previous year – was expected by some market participants to continue, although possibly at a different pace. “We believe this is a strong indicator of what is to come for the industry in Asia, which is essentially following the lead of Europe and the US,” said Robert Dykes, CEO, of trading technology supplier and agency broker Tora Trading.
Ned Phillips, CEO at Chi-East, a joint venture between Chi-X Japan's parent, exchange group Chi-X Global, and the Singapore Exchange (SGX), says competition in the market was only made possible by the Japan Securities Clearing Corporation (JSCC) which decided to clear trades for PTSs. “The key to competition is in clearing and settlement,” says Phillips. “The seminal point of 2010 was the JSCC allowing clearing across all the PTS.”
Breaking through borders
Outside Japan, venue competition has helped drive change in markets such as Australia, where the Australian Securities Exchange (ASX) has adopted a raft of measures – bringing down latency, reducing trading costs and facilitating co-location – to increase volumes.
And while the launch of pan-Asian dark pool Chi-East brought about more choice by offering trading in stocks listed in Japan, Hong Kong and Singapore, SGX and ASX advocated strength through size when they announced their planned merger in October.
If successfully implemented, the merger will create the world's fifth largest exchange group, with a combined market capitalisation of around US$12.3 billion. Both exchanges face increased competition and growth constraints in their domestic markets from alternative trading systems and as such hope that their combined offering will lead to a larger international footprint.
India’s SOR initiative
In India regulatory change, notably the approval of a framework for smart order routing of cash equities transactions between the National Stock Exchange and the Bombay Stock Exchange, is expected to stimulate demand for algorithmic and other electronic trading tools.
“The introduction of smart order routing in India was a huge step forward for that market and for the acceptance of more sophisticated electronic trading techniques in Asia,” says Murat Atamer, head of AES product for Asia Pacific, at broker Credit Suisse.
Despite regulatory progress on some fronts, India remains relatively difficult for foreign firms to access. Equally, Indian firms have also struggled to trade on foreign markets, says Steffen Gemuenden, CEO at RTS Realtime Systems, a trading and market access technology supplier. “A lot of local market participants in India are looking for more sophisticated solutions. They are slowly opening up, but there's a long way to go.”
Nevertheless, India has already joined in the global upsurge in commodities trading volumes and Gemuenden suggests the country is at the very start of a period of sustained growth in financial market activity, given the disparity between current volumes and population size.
China realising its potential
While some foreign firms might be frustrated by India's approach to regulatory oversight, China is perhaps the most difficult of the major Asian countries for non-domestic traders to access. But demand remains strong. “The west is anxious for any open channel through which this market can be accessed,” Paul Rowady, senior analyst at consultancy firm TABB Group told TheTRADEnews.com in October 2010.
Gemuenden at RTS notes that his firm has seen significant interest in the country's securities markets, especially trading commodities futures. “A lot of people have put ”connecting to China' in their 2011 business plans,” he says. “We are actively looking into connecting our software to Shanghai, Shenzhen, Dalian and the China Financial Futures Exchange.”
Meanwhile Hong Kong's equity market is currently expecting to see its first renminbi-denominated transaction in early 2011. Exchange operator Hong Kong Exchanges and Clearing has undertaken a series of measures to prepare for the listing and trading of renminbi products, including making available the exchange rates for calculating stamp duty and other trading fees on renminbi and US dollar transactions.
The US$50 billion IPO of Agricultural Bank of China in June has been seen as a landmark moment in a year in which emerging market primary issuance exceeded developed market issuance by a factor of three. “Though the economic shift away from developed markets towards emerging markets is undeniable, so is the fact that stock market excesses are shifting in the opposite direction,” comments Meurig Williams, managing director, regional head of equity, Europe and the Middle East, Daiwa Capital Markets.
Asia’s mindshift?
Perhaps the biggest change in the Asian trading landscape is more subtle. Andrew Freyre-Sanders, head of equity execution services, Asia at the Royal Bank of Scotland, identifies a shift in mentality. “When I first moved to Asia two years ago, everyone watched the US overnight,” he says. “Now, nobody cares. They just watch what happens in China every day. I think it's been exacerbated by the fact that everyone sees the US and Europe as unexciting and debt-ridden. The growth story is all in Asia.”
As Asia's buy-side increasingly embraces electronic trading technology, the nature of competition between brokers has also changed. Atamer at Credit Suisse says his firm has worked hard over the last 12 months to increase crossing rates via its internalisation engine, Crossfinder, an example of algo-performance driving change. Yet he also recommends caution.
“The safety of trading algorithms will be increasingly important and I think many entrants to electronic trading in Asia will have to play catch up in this respect,” says Atamer. “My own professional ambition for 2011 is to extend our lead on algo safety and performance through further customisation of our algos with regard to the specific characteristics of each Asian market.”
Glenn Lesko, CEO, Asia at agency broker Instinet, says that the new trading landscape and available tools already support best execution far better than they did 12 months ago. “It's up to investors to take advantage of them.”
Chi-East's Phillips supports this view in urging market participants to continue to demand better execution in 2011. “The most significant risk we face is that people wait and see if things are going to change,” he says. “Nothing changes when people sit back and wait.”
Perhaps regulation holds the key. Williams at broker Daiwa Capital Markets warns against the populist attraction of over-regulating financial services. By trying to secure electoral advantage in fixing the finance sector, he warns, politicians are in danger of strangling the financial services golden goose.
However Lee Porter, managing director, Asia at block trading venue Liquidnet hopes that 2011 will see lower volatility. “We hope for minimal macro events and a prudent regulatory environment,” he says. “Under these conditions, we should see increased equity fund inflows, which will ultimately benefit all market participants.”