Adoption of electronic trading in Asia needs further encouragement, according to the Asia Securities Industry & Financial Markets Association (ASIFMA).
The industry body has made specific recommendations for improving Asia’s trading environment within its white paper, “Asia’s capital markets, strategies for sustained growth”.
As well as promoting electronic trading, regional consistency of controls are also needed to support further growth.
For example, ASIFMA said prohibitions of direct market access within Asia add to international investors’ operational challenges and costs. It wants to see sharing of best practice across markets and with industry groups, in order to facilitate the standardisation and control of electronic trading.
Explicit costs: too high
The report goes on to say that high transaction costs and transaction taxes are a barrier to market development, and need to be cut to enhance Asia’s cost competitiveness relative to global markets.
It points out that a number of Asian markets exhibit unusually high transaction costs relative to other regional and global markets and in some cases are among the highest in the world. In Hong Kong and Singapore, for example, transaction costs are very high relative to other developed markets.
“They could consider removing stamp duty,” said Mark Austen, CEO of ASIFMA. “Stamp duty does produce revenue of course, but removing it would increase volume and enhance the ability for companies to raise money. Ultimately, the cashflow would balance out net/net via higher receipts of corporate taxes.”
Implicit costs: also too high
The impact on prices from transactions and information leakage as a result of market liquidity characteristics are also excessive, according to ASIFMA.
Impact cost is high in Asia, relative to other regional and global markets and needs to be cut by reducing information leakage in the market.
ASIFMA suggested that one way to reduce impact cost is via block trading. It said that this can be far more efficient and cost effective than entering orders into the central order book of the stock exchange, which may not be sufficiently liquid at the time the trade needs to be done.
“Block trading would be a significant way of reducing implicit costs,” said Austen. “People do become aware of deals sometimes and front run. A better way would be to negotiate off-exchange and arrange a price. When there are more people in the chain, there’s more information leakage. DMA also helps in this process, as you don’t have to go through a local broker who might front-run.”
ASIFMA also believes that more Alternative Trading Systems (ATS) would help cut implicit costs, by operating as non-displayed venues. This is because details of orders are only put into the public domain after a trade has completed, which would minimise the potential for premature leakage of an investor’s intentions, as well as via midpoint matching, where both buyer and seller benefit from improved prices.
“In Asia ATSs are not well developed and it needs to be looked at,” said Austen. “There’s no market in Asia which offers a high degree of competition. In U.S and Europe competition has been introduced and the costs of trading have fallen. Of course existing exchanges don’t like new competition, but Asia can learn from elsewhere, and put in place the regulatory plumbing upfront, such as circuit breakers.”
ASIFMA also considers that remote memberships of exchanges needs to be improved and Asian regulators should collaborate to allow substituted regulatory approval, where approval and regulation under another regional regulator is taken into account as part of their assessment for remote trading membership.
As a result of obstacles to becoming members of exchanges, primarily the hurdle of requiring a local presence, many international brokers avoid becoming members of these Asian markets, and route their trades to one or more locally incorporated brokers.
“If they could easily sign up remote members, stock exchanges would be in favour because it means higher volumes,” said Austen. “However, regulators seem to want to encourage and give preference to local brokers. If regulators recognised that a stable liquid market was the ultimate long term priority that would help their economies more than simply routing orders through local brokers.”
ASIFMA says this exacerbates the risk of information leakage and impacts price loss because it increases the credit risk for international brokers that face a smaller broker, the operational inefficiencies in additional back-to-back settlements; and a lack of transparency in technical platforms.