What are the key intricacies when trading in Asia?
I understand that there are a number of European HFTs [high frequency trading firms] and market makers that are moving into the Asian markets because profitability here has been through the roof. But, if a European company has the desire to move in and simply attempt to plug and play their models into Asia, I suspect that they’re going to be in for a rude shock. Asian markets aren’t as well-behaved as those in Europe. There’s a lot of information that isn’t incorporated into market prices here. It is not uncommon for a large number of stocks to hit the daily limit ups and downs, whereas in Europe that is something that is pretty rare. The reason for that is that in Asia, there can be somebody who has information that isn’t disseminated, because a large amount of these stocks don’t have good research coverage. This is hard for firms to pick up, of course, with a ‘plug and play’ approach.
Here at Grasshopper, we have adapted around that in several ways. For example, one of the strategies that we employ specifically revolves around looking for stocks with an anomalous amount of trading – where it is clear from the trading patterns that somebody somewhere knows something and is driving the stock in a certain direction. That is something that differentiates what we do, whereas in other markets, players will focus more on just plain old vanilla market making and will miss this.
How important is the role of regulation?
Regulation in Asia can change very quickly and very unexpectedly. In mature economies, in markets like Japan, say, the regulators would be kind enough to give you at least one year’s warning before making any serious changes, and include consultations also. But in other jurisdictions—Korea for example, where a short sale ban was recently announced—regulators can reveal changes very suddenly. We have encountered various cases where the rules changed quickly, or where there are multiple interpretations of an existing regulation, the interpretation of which changes with the politics of the day.
There was a recent case regarding short selling, where we had a certain interpretation of the short selling rule, commonly accepted among market participants, and we consulted with our brokers and the regulators to check that they agreed with that interpretation. The regulators did but one of our brokers refused to recognise the interpretation, choosing to stick with the more conservative interpretation solely to err on the side of caution. That’s something that has been an ongoing conversation between us, our brokers, and the regulators.
In Asia, it’s not enough to just read the rulebook, you need to figure out how the regulators specifically interpret things case by case and assess where their stance is on each particular area.
Where might foreign firms struggle entering these markets?
A popular approach has been the ‘go big’ approach which we’ve seen a lot over the years. Firms come in and attempt to gain a dominant market share by trading a lot for very marginal profits, then using those volumes to squeeze brokers and try to get better commissions. The problem with that approach is that it tends to alienate. The local brokers have previously said that they feel alienated or bullied by the practice of foreign entrants coming in and forcing a large market share – it creates a certain distrust. The local brokers may not be willing to share privy information because they don’t view you as somebody they can trust.
You can be caught off guard. For example, a few years ago there was a large HFT that was effectively banned from trading in Thailand because of some short selling rules violations, but it was something that was entirely avoidable – all the other local prop shops, including the ones trading in Singapore, all successfully sidestepped around it, and it shows the importance of a good relationship. It pays to be a bit more collaborative.
What is the outlook for future trading opportunities in Asia?
Trading Asian markets can be quite a dicey proposition compared to more mature markets, but the Asian growth story is what fuels growth globally and it will certainly continue to do so for many years to come. In the last couple of years, we have seen the world’s third-largest economy, Japan, awakening from its long slumber after nearly three decades of low inflation and wage stagnation. India, the world’s fifth largest economy and the fastest growing economy, is entering a rapid growth phase on the back of its strong economic infrastructure and demographics. Many market watchers project the same phenomenal growth as what has happened to China over the last 20 years.
Ultimately, it’s about developing a deep understanding of the markets, fostering meaningful relationships with local partners and of course, having the right strategies and technological platforms to trade in these markets. Trading participants in Asia are increasingly sophisticated. Many have long embraced algorithmic trading, and the improving availability of high-quality electronic data, along with the parallel AI revolution means that uncannily strong predictive trading models are being deployed to trade in Asian markets.