At the beginning of 2015, JP Morgan Asset Management’s global head of equity trading Kristian West announced that global automation and standardisation of execution was a priority for the business for the year ahead.
The conformity programme was designed to unite the business under one order management system and simplify the group’s existing fragmented trading model.
For JP Morgan Asset Management, executing this in the Asia region represented one of the most ambitious trading projects that the company has undertaken due to the numerous regional differences.
Just over two years ago, JP Morgan Asset Management asked its London-based head of program trading to up sticks and move to Hong Kong.
JP Morgan AM set up more than 35 years ago in Hong Kong and has since established a network of eight offices in the region – Hong Kong, Melbourne, Mumbai, Seoul, Shanghai, Singapore, Taipei and Tokyo.
When Lee Bray took up the position as head of trading for the Asia Pacific region, he was also tasked with bringing global standards to the region’s operations.
In an interview with The TRADE Asia in 2013, he explained many of the challenges that faced him – transaction costs analysis usage, regional integration resistance and benchmark issues to name but a few. Things have moved on a lot since then.
Bray explains: “I was asked to come over to APAC where we were going through a change as to how we operate our businesses. Historically, we have always run things separately between the US, Europe and APAC. Even in APAC, there were different desk heads.
“My boss Kristian West…. created a new role for me to come into as head of the APAC region. My aim was to regionalise APAC, which had never really been the case – [looking at] approaches to execution from a systems perspective that would feed into a global model.
“We have just moved towards a global execution management system which we put in at the end of 2014. With respect to the EMS, we are now globally aligned.
“With the order management system, we hope to go live in APAC in early 2016. When you are talking about systems, they take a while to input. There is a roadmap for these things.”
In his interview with The TRADE Asia back in 2013, Bray flagged the prevalence of the VWAP benchmark across Asia as a concern.
At the time, he said that the widespread usage of VWAP across Asia could be prohibitive to using an implementation shortfall benchmark.
However, fast-forward two years and Bray is now more optimistic that this is a change that can be made as part of a longer-term plan.
Another of the global themes playing out across the business is the focus on unbundling.
While some buy-siders in Asia have stressed that the differences in trading models regionally mean that full unbundling should be resisted, opinion is divided.
Eugenie Shen, managing director and head of the asset management group at the trade group ASIFMA, told The TRADE Asia back in April that her members had expressed concerns about plans by European and US regulations to ‘unbundle’ research and commission fees. She said she thought that this may impact the Asian region adversely because there will be insufficient investment in research on emerging market small and mid cap companies.
She said: “I think Asia is different. If you look at China and Malaysia, there is not enough research. Who is paying for the research? It is tricky.”
Bray is more pragmatic. He acknowledges the regional subtleties but stresses that JP Morgan Asset Management is a world leader, and therefore has to adhere to the highest possible standards.
He explains: “At JPMAM there is a big focus on unbundling as a global theme. In working towards the most stringent application of any regulatory environment, we keep a close eye on what is going on in the UK and what is going on with the MIFID situation as it continues to evolve.
“I am in constant contact with Kristian (West) in terms of how we apply that to this region. It is more difficult given the nature of the region. In Japan, there is no obvious regulation that allows for a CSA (commission sharing agreement) environment and the same in Taiwan, which can be problematic.
“We have to fit in with the local regulatory environment and if it doesn’t cover unbundling, all we can do is watch. Hopefully we can come up with a solution as an asset management community in the region.”
Bray likens the concerns raised by ASIFMA members about a possible lack of research in certain areas due to insufficient funds to similar concerns raised in Europe about the quality and volume of research available for small and mid-cap companies.
He says: “There have been concerns that [this research is] less profitable and might be the first thing to be cut by the investment community. But there is a need for small and mid-cap research in Europe just as there is a need for some of this emerging market research.”
Bray said the past 12 months have been particularly busy for buy-side trading bosses in Asia as a result of new algorithm regulations brought in during the early part of 2014 and with the launch of Shanghai-Hong Kong Stock Connect in November last year.
The launch of Stock Connect attracted a handful of critics due to initial teething problems (see this issue’s Derivatives Watch), but Bray is among the many supporters of the scheme who believe the turnaround of the project is to be commended.
He says: “If you look at what they achieved in such a short amount of time, from a practical trading perspective, I think it was amazing. It is a credit to the financial industry in Hong Kong and China. It is a massive undertaking and the market remained open.
“Obviously, the sticking point for many international asset management firms was some of the legality issues, beneficial ownership being one of them.
“Yes, we could learn something from that and engage with the regulators a bit more, but you can’t expect everything to go smoothly from day one and as far as I can see, it has gone relatively well.”
The biggest project for Bray that is looming large on the horizon for the next few months is the development and implementation of the new order management system.
He says: “They [JP Morgan AM] have implemented the new OMS in Europe and we are now working on rolling that out over here in APAC.
“With the regional nuances that we have here, it is quite a big undertaking.
“It is the internal accounting system of the trading function. It will take us nearly a year to sort that out.
“We have an internal TCA product that we are trying to align on a global basis. It evolved in two forms – we are now rolling that into one. We have just employed someone on the IT side to work on that. They will be working on the global team but sitting here in Hong Kong.”
Themes to watch
The growing influence of algorithm usage in the APAC region is one of the key market themes that Bray believes will have a significant impact on the business in the years to come.
He says: “For long funds like us to walk in to some automated solution for easy-to-execute orders will be about two to three years out.”
A second theme which he flags as important is the move away from focusing on individual markets to more of a liquidity profile for execution.
For JP Morgan AM this means traders split not by asset, but by the market liquidity associated with that asset.
Bray says traders are less often working in linear asset classes but instead working in teams dividend into ‘liquid’ and ‘illiquid’ operations. The latter are a specialised team of traders, which have responsibility for blocky, illiquid stocks, for example.
He says: “The right trader deals with the right question. If we are looking to unwind a large position in a particular stock, that will be tackled by the single-stock, illiquid traders. If we are looking to optimise an algo offering, it will be the liquidity desk.”