Accessing scarce liquidity in the Indonesian and Philippine equity markets is a constant challenge for institutional investors, but the increasing availability of algorithmic trading solutions should soon result in better execution quality, brokers say.
UBS, on 29 March, became the latest broker to launch algorithmic trading in Indonesia. Yang Xia, head of direct execution services for UBS in Asia Pacific, said, “For many institutional investors investing in emerging markets such as Indonesia, Philippines and Thailand, the challenge they face is one of liquidity. More assets are being allocated toward Asia and the size of funds investing in Asia is getting bigger, but the liquidity in those smaller markets is still scarce. Investors still can't buy sizeable volumes of shares easily without impacting the market.
There are a few answers to that challenge, one of which is algorithmic trading.”
As a member of the Jakarta Stock Exchange, UBS already offers DMA for Indonesian stocks. In January, Liquidnet, the buy-side only block trading venue, added Indonesia equities to its platform. In December 2009, Credit Suisse launched algorithmic trading for Indonesian equities, having offered DMA to Indonesia since August 2008.
Yang added, “As interest in the Indonesian market continues to grow, clients have increasingly requested access to algorithmic trading products to improve their interaction with the market’s liquidity. Economic development in Indonesia, like many ASEAN markets, has meant greater levels of liquidity and contributed to the steady inflow of funds into the market, which is a trend we expect to continue.”
Indonesia’s GDP expanded a faster-than-expected 6.9% in the fourth quarter of 2010 from the year-earlier period, resulting in a full-year growth of 6.1%. The country attracted around US$13 billion of net foreign inflows in 2010 and the central bank forecasts inflows to continue this year.
Though still early days, the Philippines is expected to be the next ASEAN market to introduce DMA and algorithmic trading. The Philippine Stock Exchange (PSE) has been upgrading its infrastructure in preparation for the adoption of electronic trading. PSE has migrated to NYSE Technologies' NSC V900 trading platform, enhancing its product range, trading performance and volume capacity
Murat Atamer, Credit Suisse's head of AES product, Asia Pacific, said, “The Philippines market is constantly growing but it is still not a very liquid market by global or regional standards.” In terms of bid-offer spreads, the Philippines is one of the most expensive markets to trade. Intraday spreads are estimated to range between 100-200bps.
Atamer noted that the market is “extremely difficult” to trade because the volume curve is very volatile. “You don't know when the volume will go through,” he explained. “This happens with non-electronic markets. When you can trade electronically, the algorithms slice volumes based on estimated historic volume, and if everyone does that, then it becomes self-fulfilling and the market start trading like that. This is not the case in the Philippines at the moment.”
A surge of growth in the Philippines in the fourth quarter brought full-year economic growth to 7.3% in 2010, the biggest gain in GDP since 1976.
“We definitely see a pick up in liquidity in the Philippines. Liquidity picked up around September 2010 to around US$80 million a day. After September, we've been looking at around US$150 million a day. Before 2009, it was more like US$40 million,” Atamer noted.
Credit Suisse has this week opened local securities brokerage operations in the Philippines, having obtained a securities broker-dealer licence for the PSE in February. The firm will offer sales trading, program trading and execution, as well as research and sales services to clients.
The increase in liquidity in the Philippines as well as the proposed establishment of a link between ASEAN exchanges may pave the way for the adoption of algorithmic trading.
Yang added, “In the short term, we could see the Philippines introduce electronic trading such as DMA and algorithmic trading. But that will also depend on how the liquidity situation evolves on the PSE. Currently, the PSE's liquidity is still relatively small compared to other exchanges. Investors are coping reasonably well, so the demand for the Philippines to have algorithmic trading hasn't been as strong. But with other markets now having automated trading mechanisms, this may drive the Philippines to look more closely at it. When investors invest around the whole region, it's easier for them to have a consistent execution platform.”
Author: Jill Wong