China and India offer promising potential for high-frequency trading (HFT), but success, says Laurent Cunin, Hong Kong-based head of Asia-Pacific at multi-asset brokerage Newedge, will depend on the ability of trading firms to adjust their strategies to cope with the complex regulatory environments in these markets.
In China, a toughened regulatory stance on speculation on the futures exchanges since late last year has only added to the existing complexities of implementing market access, trading software and network connectivity under a tightly-controlled regime. The Zhengzhou Commodity Exchange, Shanghai Futures Exchange and Dalian Commodity Exchange separately issued rules in November to curb “abnormal” trading as commodity prices hit record highs. The exchanges will alert the China Securities Regulatory Commission (CSRC) if investors are found trading between their own accounts or frequently placing and cancelling orders. Investors are also disallowed from using related accounts to hold positions in a way that exceeds their individual limits.
“Our clients often have to determine how to adapt their strategy in order to best meet the regulations in different markets,” says Cunin, noting that this requires Newedge to provide strategic advice as well as execution capabilities.” Most active in the futures and equities markets, Newedge is also ramping up its capabilities in the fixed income and foreign exchange space. “In fixed income, most of the clients who are interested are based in Asia and they are looking to use Newedge's network for sourcing bonds in US and Europe,” comments Cunin.
The firm has established a reputation for being able to help high-frequency traders, a large proportion of which are proprietary trading firms that cut their teeth on the Chicago futures markets, to expand their operations into Asia. “Each Asian market comes with its own set of rules and regulation. When a client in the US says, ”We want to trade the Asian market. You tell us where to start,' we can differentiate ourselves because of our Asia-Pacific coverage. In the mature markets of Japan and Singapore, it will be challenging for Newedge to grow even bigger as we already have 25-30% market share, based on volume traded on the futures exchanges. In 2011, we will keep growing our business in the mature markets, but we will also be putting a lot of resources into expanding our presence in markets like China and India, which continue to offer strong growth potential,” he adds.
Overcrowded home markets, fear of post-crisis over-regulation in Europe and the US and thirst for new opportunities have propelled many high-frequency trading firms to migrate to Asia. Many choose Japan as their Asian bridgehead, but an increasing number of prop trading firms are drawn to China and, to a slightly lesser extent, India.
In India, a large portion of high-frequency trading is focused on single stock futures and index futures, and most of it is traded on the National Stock Exchange, one of the country's two main stock exchanges. “In India, there's a very complex set of regulations and it can be difficult for trading companies to access the local market,” says Cunin. “This is where we go beyond being a basic broker to one with added value. We use our local expertise on the ground to offer guidance to our clients on the best possible set-up locally.”
Newedge offers trading in China via a joint venture with local investment bank CITIC, called CITIC Newedge Futures which has a licence to trade on the Shanghai Futures Exchange, Dalian Commodities Exchange, Zhengzhou Commodities Exchange and China Financial Futures Exchange.
Some market participants observe that high-frequency trading models that have been successful elsewhere in Asia may not be appropriate in China and India because the instruments have not yet been developed. At the moment, futures-focused prop trading firms are trading Indian and Chinese commodity futures contracts against similar products on the London Metals Exchange, CME Globex and the Tokyo Commodity Exchange. The incomplete nature of the regulatory framework in China and India means that the two sides of such trades cannot be cross-margined, thus adding to costs. Many expect that when China and India's commodity markets become easier to trade, there would be more cross-exchange trading and competition within Asia.
But as can be seen from the change in China's regulatory climate at the end of last year, regulators in these markets are still not totally comfortable with large prop trading groups at the moment, which gives rise to the need for the regulators to be educated on the intricacies of high-frequency trading and its relative pros and cons.
“We have a very close relationship with the local regulators. We listen to where they are coming from and we also bring across to them our international views during our regular meetings with the CSRC in Beijing and Shanghai,” Cunin notes.