Buy-side firms that trade Asian equities from Europe should view the region's markets as different from, but no longer behind, the west, institutional investors were told at a one-day conference, ”Trading Asia from Europe', held by agency broker Instinet in association with The TRADE in London on 16 February.
Received wisdom asserts that equity markets trends – such as use of execution algorithms, competition between trading venues, and growth of high-frequency trading – first establish themselves in the US and are then repeated in Europe before being copied in Asia. But the rate at which some Asian markets have adopted newer trading techniques and technologies suggests that any lag from Europe has all but disappeared.
According to research published in January by Greenwich Associates, 18% of institutional trades were executed via self-directed electronic trading in Asia, compared with 22% in Europe and 37% in the United States. Although most Asian equities markets are still dominated by monopolistic exchanges, limited liquidity fragmentation has taken place in Japan, where 5% of equity trading volume took place away from the Tokyo Stock Exchange at the end of 2010. Dark liquidity venues have attracted volumes in Hong Kong, Singapore and Australia, where the Australian Securities and Investment Commission has outlined a framework that would allow exchange competition.
Many differences remain, several speakers asserted, primary among them the absence of a unifying piece of pan-regional regulation to force competition on incumbent exchanges and encourage best execution.
Glenn Lesko, CEO of Instinet Asia, highlighted faster trading speeds and growing competition between trading venues as the two most significant factors driving change in the Asian trading landscape. But he warned against making generalisations. “There is no such thing as the Asian equity market,” he said.
According to George Molina, head of Asian trading, Franklin Templeton Investments, who established the firm's local trading presence in the region in 2001, transparency remains a key defining characteristic of several Asian equity markets, noting that savvy retail investors are very quick to exploit a large trade in a local stock by an international institution attempting to build up a position. He also noted that Asia-based trading desks of large global institutions are able to identify flow sent for ”overnight' execution by brokers in the region from US and European trading desks.
Mark Northwood, global head of trading, Fidelity International, who previously ran the firm's Asian trading operations from Hong Kong, added that the barriers to building up a large position posed by information leakage to retail investors were amplified by regulations in some countries that force investors to declare stakes in locally listed firms. Noting the risk of information leakage when trading through a local broker to source liquidity in a smaller name, Northwood advised accessing such sell-side firms via trusted global partners.
Acknowledging that the level of liquidity fragmentation in the larger Asian markets is currently lower than that witnessed across Europe at present, Instinet's Lesko argued that the growing choice of trading venues meant that the existing practice of a European trading desk placing an Asian order in a VWAP algorithm for overnight execution would result in sub-optimal performance, adding that “next generation” algorithms were already able source liquidity from multiple Asian venues and react to real-time market data. “There are already circumstances in which accessing every pool of liquidity available will benefit you,” he said.