Buy-side traders in Asia are experiencing wide variations in VWAP algorithm performance, with Hong Kong and Singapore faring worse than Japan, according to a study by trading platform provider and financial services firm Tora.
The study compiled 120,000 algorithm orders from the first half of 2010 and found slippage for VWAP algorithms varied across markets and brokers. Average slippage was 15.1 basis points in Singapore, 9.5 bps in Hong Kong and 4.5 bps in Japan. Results varied by as much as 8.0 bps across the best- and worst-performing broker algorithms in Asia.
“You ask for VWAP and think you're going to get VWAP, but very often you don't,” commented Tora chief operating officer Ian Lombard.
Slippage is the difference between the intended price of a trade and the price at which the trade is executed. The study focused on VWAP as this benchmark remains one of the most widely used in Asia.
Tora attributed the difference between the three Asian markets in part to the concentration of liquidity in those markets in individual names, and to higher volatility in Hong Kong and Singapore versus Japan. Lombard said that the launch of the Tokyo Stock Exchange's Arrowhead trading platform in January this year had given Japan an added advantage over its Asian rivals.
“We looked at how algos are doing in 2010 compared with 2009,” he said. “There is a very solid improvement in the average performance [in Japan]. Arrowhead definitely had an impact on that. It's faster and the spreads are tighter. Both of those contribute to improved performance.”
Differences between venues were not the only factor behind the wide range of execution outcomes. Lombard also pointed to the approach brokers took to the ongoing development of their algorithms.
“Two brokers that were in the bottom third and fourth quartiles last year both rose to the top quartile this year following substantial investments in their Asian infrastructure,” explained Lombard. “So we're seeing a fairly broad difference between the brokers who are choosing to invest in their infrastructure and those who are taking a more passive approach.”
Lombard emphasised that electronic trading is still in its early stages in Asia and added that algorithms are already valuable tools for the region's Asian buy-side traders, if used carefully. “At the end of the day, using an algo can net you savings of almost 40%. So it's still a better execution, given the right situation,” said Lombard.
He admitted however that VWAP is gradually being overtaken by buy-side interest in newer, more customisable algorithms.
“We are starting to see some migration away from VWAP, towards more targeted algos, but there's a long way to go,” said.
VWAP was used by 31.2% of Asian respondents to The Trade's algorithmic trading survey in 2009, but this figure had fallen to 16.5% by H1 2010.