Alternative trading systems (ATSs) will gain a solid foothold in Asian markets, garnering almost 25% of market share by the end of 2014, according to a leading research agency.
"Given imminent regulatory changes across the major financial centers in the Asia-Pacific and continued adoption of electronic trading, we expect to see increased market competition for the transaction business in the Asia-Pacific," said Simmy Grewal, senior analyst at Aite Group and author of a new report entitled 'Electronic trading update: Attractive markets lie to the east'.
The firm estimates that while Asia's ATSs only stole 3% of average daily trade volume from the incumbent exchanges in 2010, rising to 12% last year, after climbing once more in 2013 to 17%, alternate venues could win 22% market share next year.
As a source of continuing change, Grewal points to the Hong Kong exchange's major technology upgrade of its trading platforms, connectivity networks and data centre. Dubbed Orion, the project is scheduled for completion by the end of 2013. Similarly, in 2011, the Singapore Exchange utilised NASDAQ's Genium INET technology for the basis of its Reach trading engine, which offers 90-microsecond latency.
"Technology upgrades that level the playing field for electronic trading firms are happening across the region and are in various stages of progress and refreshes," said Grewal.
But while the region's developed markets - Japan, Australia, Hong Kong, and Singapore - have advanced their infrastructures following Western cues, compared with Europe and the US, Asia-Pacific market structure is more nascent, often because of local regulator suspicion of alternative venues.
"We have seen the emergence of alternative trading platforms in the Asia-Pacific over the last few years, but the region's market share penetration has been remarkably unassuming, especially when compared with the significant penetration that multilateral trading facility Chi-X Europe has had in the European equities market in a relatively short period of time," said Grewal, explaining that the regulatory environment in Asia-Pacific markets had failed to create a "ripe environment" for alternative venues, with many Asian regulators only just beginning to realise the benefits of introducing competition.
In 2011, Australia opened up its equities market to Chi-X Australia and is now considering its post-trade structure, while traders in Japan have had alternative venues, proprietary trading systems (PTSs), for more than 10 years.
And emerging markets such as Korea, Taiwan, and India are "hot on the heels of their counterparts in terms of technology upgrades", explained Grewal: "But elements of regulation - such as hefty transaction taxes and foreign IDs for trading - need revising in order attract a sizeable share of the foreign investment entering the region.
Grewal suggested that while traders need to be aware of the complexity and disparity of regulation, market structure and technology across the Asia-Pacific region, they should view it not as a deterrent but as an opportunity.
"The complexity and continuing evolution of these markets will refresh the playing field on which electronic traders battle," said Grewal. "This means there is constant opportunity to develop internally to take advantage of external developments in each market."