Alternative trading systems (ATSs) will secure 20% of the total equities value traded across the Asia-Pacific region by the end of 2012, even though their combined share is currently much less than 5%, according to a new report from research and consulting firm Aite Group.
The report, ‘The Rise of the Asian ATS Market: The Waiting Game’, predicts “steady growth and adoption of off-exchange trading venues” including brokers’ internal crossing networks as well as independent platforms, over the next three years.
However, the report points out that alternative trading platforms in the region face an uphill struggle. While ATSs have thrived in the US, Canada and Europe in recent years, Aite said that unlike these markets, the Asia-Pacific region lacks a single set of regulations and standardised market practices, hampering the development of alternative platforms.
Furthermore, the report noted that most markets feature a single, monopolistic exchange with close ties to regulators and clearing organisations, making it difficult for new entrants to compete directly against the incumbents.
Alternative trading platforms hoping to break into Asia would also need to educate the buy-side about their benefits, according to Aite. “Demand for ATS adoption
remains low — local buy-side clients are still not convinced that ATSs can add value to their overall workflow,” the report said. “While the prospect for cheaper executions is certainly appetising for clients, they are not thrilled about the potential trade-off for increased complexity in market structure and additional spending in their own IT infrastructure to compete.”
Aite believes winning local support will be key for ATSs. “The introduction and adoption of ATSs is currently being driven by global brokers and the foreign investment community,” said James Kang, analyst with Aite Group and co-author of the report, in a statement. “The future success of ATSs cannot be rooted in foreign order flow alone; for long-term sustainability and growth, ATSs must succeed in capturing flow from local clients.”
Aite views the biggest obstacle to ATS adoption as regulation. While some markets, such as Japan, already have ATS regulation and a range of alternative platforms in operation, the report points out that some countries are still in a state of regulatory limbo, in part because of the recent financial crisis.
Despite the difficulties, Aite said much progress has already been made by brokers and aspiring ATSs to build a strong presence in Asia. A further positive sign is that most Asian exchanges appear to view the influx of ATSs into their markets as inevitable.
Also, there are ongoing conversations among exchanges, ATSs, brokers and buy-side firms that aim to create an appropriate competitive environment in which all of the major market participants can benefit.
“Aspiring ATSs are taking a ‘co-opetition’ approach in Asia, working closely with both regulators and exchanges to create a new market environment conducive for the adoption of ATSs,” added Sang Lee, managing partner with Aite Group and co-author of the report.