Asia-Pacific derivatives markets are growing in size and accessibility with the more open markets of Japan, Australia, Hong Kong and Singapore holding the greatest appeal for western traders, according to a new research report by TABB Group, ”Trading in Asian derivatives: opportunities near and far'.
Paul Rowady, TABB senior analyst and author of the report, says that derivatives markets are becoming more mature and are being viewed much like cash markets in terms of their utilization in traditional strategies. “The adoption of futures and options by managers utilizing traditional strategies and retail investors is all part of the growing interconnectivity of the cash markets, listed derivatives and eventually OTC derivatives markets,” he says.
“They will all be used in ever more creative ways and in ever more innovative strategies. The perspective from the west is that Asia-Pacific is where you're going to have a lot of economic growth relative to Europe and North America. That lays a strong foundation for liquid capital markets, but with that activity there may be a little more volatility, which gives reasons to derivatives players to migrate their strategies that have worked well in US and Europe to Asia-Pacific. It's a natural progression,” says Rowady.
In 2009, Asia-Pacific captured 35% of global futures and options contact volume, he found. Though the figures are distorted by variance in contract sizes, notably in South Korean KOSPI 200 options, the trend is undeniable. “The drivers that pull interest to Asia-Pacific are firmly grounded in the desire for access to new pools of liquidity, the expectation of more open markets and explosive growth in new products going forward,” he says.
According to Rowady, 99% of commodity and 80% of FX derivatives volumes in the region are executed in closed or challenged markets – China, India, Korea and Taiwan – with 100% of rates and 31% of equity-linked derivatives volumes in the open markets in Japan, Australia, Singapore and Hong Kong. Exchanges with the most highly integrated trading platforms across asset classes, including the Hong Kong Exchange (HKEx), Singapore Exchange (SGX) and the Australian Securities Exchange (ASX), are reaping the rewards of investment.
“SGX, HKEx, ASX are among the key players that are investing heavily in new infrastructure to accommodate the interest of western market participants in trading in more highly automated and creative ways that they couldn't do in the past because the infrastructure couldn't handle it. The exchanges realise that they just have to dramatically enhance the amount of capacity that they're able to provide for certain specifications because the world is just becoming a smaller place when it comes to capital markets and that more multi asset class, multi regional strategies are going to be born. Asia-Pacific is going to be a big part of that,” Rowady says.
Rowady adds that the catalyst driving change has to do with a growing sense of interconnectedness and interdependency between east and west, and that western-based traders are becoming much more engaged in the region's increasingly accessible derivatives markets. Growth drivers of the Asia-Pacific derivatives markets include local hedging needs, liquidity development and international strategy development.
“The trading infrastructure in Asia-Pacific is a broad spectrum from the very advanced, which you might find in Japan with the launch of Arrowhead, all the way to India, which has quite legacy infrastructure that's in need of upgrades for capacity and speed,” he explains. “The more advanced technologies are going to be acceptable to a broader range of strategies, including some of the more highly automated and high-frequency turnover strategies that generate a lot of volume. When markets have legacy infrastructure, the volume of speculation in the total volume is going to be limited to more manual, less automated execution which would be retail and lower-frequency turnover strategies.”
Rowady believes that Chinese derivatives markets will remain largely off-limits to most outsiders for the foreseeable future, except for A-list financial heavyweights able to satisfy the hurdles of the Qualified Financial Institutional Investors programme. But even without challenged access for foreign investors, Asia-Pacific markets are widely dispersed and on the verge of becoming fragmented like those in the west. Apart from primary exchanges including derivatives exchanges, there are nearly 20 alternative trading systems (ATSs) and dark pools in the region which are almost exclusively focused on equity trading in major markets like Australia, Hong Kong, Japan, Singapore, and to a limited but growing extent, South Korea.
“With the strength of equity index futures serving as proxies for nine of the leading economies in Asia-Pacific, as well as the growing list of Asia-centric exchange-traded funds, the fragmentation represented by the infiltration of ATSs further complicates the successful execution of index and other basket-like arbitrage strategies in Asia-Pacific,” says Rowady. “In tandem with this, the proliferation of ATSs in Asia-Pacific is symbolic of a greater acceptance of western methods, and indicative of a broader trend toward greater openness.”