High-frequency trading (HFT) is improving equities markets in Japan and greater inter-venue cooperation across Asia is set to drive growth in the region to the point where it will be competing with Europe and the US, according to Serdar Armutcu, former head of quant products at Mizuho Securities in Tokyo.
Prior to working at Mizuho, Armutcu spent three years at Lehman Brothers as Asia algorithm product manager. Prior to that, he worked in Australia for nine years at ITG, Credit Suisse and State Street Global Advisors.
Armutcu says Asia is the new frontier for HFT firms and the region is now home to the fastest trading system in the world – the Singapore exchange. As the region has come late to the party, it can now take advantage of that.
“It can see in other regions what has been done well and what hasn't been done so well. This, combined with the entrepreneurship in Asia and increased cooperation across the region, should see it starting to compete with Europe and the US within three-to-five years,” he says.
In Tokyo, HFT currently accounts for 20 to 30% of the market traded through brokers, so the adoption by local players [of electronic trading strategies] is not so crucial now people can trade into Japan without having a local office presence there. Japan is still the leader in Asia for HFT but the other markets are quickly catching up.
Armutcu explains HFT is responsible for increasing the breadth of liquidity across the market. Traditionally, Asian markets have suffered from very concentrated liquidity, true to the 80/20 rule – 80% of the liquidity is traded in the top 20% – so HFT has evened out that distribution, reducing spreads.
“The beneficial side effects on the institutional investor base are often overlooked because they have different objectives,” says Armutcu. “But the innovations exchanges have brought in to lure HFT players have also benefited the institutional investors.”
He says these include upgrading the trading systems on the exchanges and introducing services such as anonymous block matching.
Some institutional investors still have issues with HFTs, regarding predatory trading and increased volatility, but Armutcu insists electronic traders have a duty to educate the marketplace about what they do.
“They must strive to be more open and transparent in their approach, rather than maintain the air of secrecy many have,” he says. “The adoption by domestic institutions in Japan of the opportunities provided by alternative venues would help attitudes towards HFTs in Tokyo.”
As for China, Armutcu calls it the big elephant in the room.
“It's won't happen anytime soon but once China opens up, 60 to 70 million online traders will be providing retail liquidity to the marketplace,” he says. “That is going to be a mouth-watering prospect for HFTs who love that kind of liquidity.”
An open China will make Asia as a whole a much more dynamic marketplace.
Armutcu says there were still challenges in Asia, where cross-border trading is still relatively under-developed. He believes alternative venues will be the leading drivers of pan-Asia trading as cross-border exchange mergers are still difficult to successfully complete.
“What happened with the proposed Singapore/Australia exchange merger shows how hard it is to balance that kind of operation, so I don't think we'll see a uniform regulatory environment, let alone an Asia-wide currency, just yet,” he says.