The ASEAN exchange link is the first step towards a unified trading market that will attract more institutional flows to the region, but Asian institutional brokers say that the link is unlikely to make a major difference in the short term to the way they trade.
Daniel Lee, director of electronic trading, ETF and SBL business, group institutional business at DBS Vickers Securities (Singapore), says his firm already provides direct market access to multiple exchanges, and hence the ASEAN link “does not make a significant difference” in the short term. However, he foresees that linkage between ASEAN exchanges would provide a lower-latency and cheaper alternative for accessing the region's markets compared to networks provided by a range of vendors and agency brokers.
“Another possible advantage is that hopefully the ASEAN link project, which is supported by the ASEAN governments, would lead to harmonisation of trading rules in the ASEAN exchanges, thus providing a standardised regulatory framework to operate in. A further possible advantage would be if buy-side clients connect to the ASEAN link, it would be an alternative network for us to receive shares,” he said.
Lee does not anticipate any significant difference to order flows from an institutional business perspective. “However, there could be a change for retail broker business where their systems have largely single-market capabilities and foreign market trades have to be routed via either a separate platform or through a central dealing desk.”
He notes that the envisaged ASEAN Link initially only provides a routing network and single-market systems would need to be upgraded for multi-market capacity, such as stock codes and price feeds, in order to support multi-market trading. In other words, the retail traders whose trading system trades in a single market would not automatically get multi-market access with the ASEAN link. “I would think that the ASEAN link, simply as a routing network, would not be of significant impact in the first stages as there are already many commercially available routing networks. However, if the initiative leads to the ASEAN exchanges grouping to be perceived as one venue, it could be viewed as a significant player among the global exchanges,” he said.
Jesse Lentchner, chief executive officer of institutional broker dealer BTIG, Asia-Pacific, is also optimistic about the long-term benefits that the ASEAN trading link will bring. “We spend a lot of money on exchange connectivity and if we can actually reduce that and have one major exchange connection, it would be great for us. It would also bring the market one step closer towards a standard way of looking at companies, and it would just make for a bigger market,” he said.
However, he agrees that technology is only one part of what the ASEAN exchanges link is trying to achieve. “I don't think technology will be the most difficult part of it. The most difficult part is when you have many institutions, each with their own agenda and it's often difficult to come to an agreement on standards. Coordination will be the biggest challenge, which is probably why they brought in NYSE because that is a very competent neutral party in the middle,” said Lentchner.
NYSE Technologies will implement a single link based on its Secure Financial Transaction Infrastructure (SFTI) network to connect the national exchanges of six members of the Association of Southeast Asian Nations (ASEAN), comprising Indonesia, Malaysia, Philippines, Thailand, Singapore and Vietnam.
The technology provider signed an initial letter of intent with Bursa Malaysia, Philippine Stock Exchange, Singapore Exchange and Stock Exchange of Thailand – four of the six exchanges involved in the initiative – at the tenth ASEAN Exchanges CEO meeting in Manila in February 2010. NYSE Technologies was also contracted to offer services that provide integrated market data feeds from each market, a standardised entry point for trading and risk management and controls.
At the same time, the six ASEAN exchanges are also looking at harmonising trading rules and practices, such as opening hours and settlement systems. “It should be the beginning of agreements on settlements systems, agreements on movement of money, and agreements on standard disclosure for companies,” Lentchner added.
Most see the ASEAN trading link as the first step of the process to creating a centralised regional exchange in the longer run that is better able to compete for global institutional fund flows to Asia Pacific. The six ASEAN exchanges have combined market capitalisation of US$1.36 trillion, which puts the region as a whole roughly at the size of the Australian Securities Exchange and Bombay Stock Exchange, although still behind the Tokyo, Hong Kong and Shanghai.
But there remain a number of intermediate steps to be taken before linkages between exchanges can lead to full integration.
“For the initiative to be successful there would be hurdles that I think should be addressed. For example, a cross-border regulatory framework similar to MiFID or Reg NMS is not available in ASEAN at this point in time. Such regulation would harmonise the regulations in the different jurisdictions,” said DBS's Lee. “Also note that clearing and settlement are intermediated by home exchange participants instead of a centralised clearing and depository house. Thus, retail investors would likely still have to rely on the use of a depository agent when trading in a non-home market instead of using a central depository.”