Growing fragmentation of liquidity and an increasing sophistication of trading strategies deployed in Asia are giving rise to a new generation of automated trading platforms, according to Alex Lamb, executive board member at trading technology provider RTS Realtime Systems Group.
“The development of traders' desktops in Asia reminds me of the early days in Chicago, where Globex screens were distributed for free and the value of trading applications was not yet realised,” said Lamb. “Now, fragmented liquidity and the closed nature of some of Asia's more traditional markets present challenges that have to be assessed by trading participants.”
Among the alternative trading systems being launched in Asia, market centre operator Chi-X Global started its rollout of proprietary trading system Chi-X Japan at the end of July and is also gearing up to unveil Chi-East, a pan-Asian dark pool joint venture with the Singapore Exchange, and Chi-X Australia, which is due to launch in Q1 2011. A number of brokers have also launched internal crossing and dark pool aggregation services across the region. Other Asian markets such as India and China still have strict restrictions on foreign participation, electronic market access and alternative trading venues.
At present, claims Lamb, many Asian buy-side firms use broker-provided standardised systems that are geared towards manual, non-algorithmic trading on a single venue.
“Traders may have an application for automating trading across various trading venues, but the limited sophistication of these applications can mean you are left to manage some of the leg risk manually,” he said.
Another problem identified by Lamb is that the proliferation of standardised systems can lead to many market participants using similar strategies, which can reduce their effectiveness.
As market structure continues to develop in Asia, Lamb contends that traders in the region are starting to realise the benefits of systems that cater for automated trading and have started to implement these alongside their existing broker-supplied systems. Using tools such as RTS's RTD Tango, clients are able to build their own trading strategies, either from scratch or by tweaking existing strategies.
But uptake and development of these systems is not likely to follow the same path taken in the US and Europe.
For example, the cautious and calculated evolution of the regulatory environment in Asia has led to a greater focus of risk management controls for automated trading platforms. Regulators in both the US and Europe are in the process of examining the practice of naked sponsored access, i.e. allowing traders direct access to markets using a broker's market connections without pre-trade risk management. While US regulator the Securities and Exchange Commission looks likely to ban naked sponsored access, this is unlikely to become an issue in Asia.
“In Asia, traders have made the step from broker-provided screens to direct access capabilities that have adequate pre-trade risk management already built in,” said Lamb.
RTS has been expanding its presence in Asia over the past 12 months to keep up with client demand for its low-latency direct market access and algorithmic trading capabilities. As well as moving to larger offices in Singapore, the firms appointed a managing director for the Asia Pacific region, Stéphane Lannoy, and establishment Global Winning Technologies as the firm's new sales partner for Japan.
In addition, some Asian markets such as Singapore and Hong Kong are bound by limits controlling the amount of orders that can be sent to the domestic market using any one market connection.
While Lamb considers the cost of buying new connections for traders that want to increase their per second capacity of orders to be “incidental”, he adds that this has affected the type of functionality required from trading platforms in Asia.
“Traders are very wary of being caught with orders they might not want to trade because of limits on sending orders – which can include cancellations,” said Lamb. “We have therefore spent time building timers and counters for orders and making sure algo engines know how many available messages they have. Exchanges and participants will benefit from this as more efficient machines will lead to greater liquidity.”
Lamb expects the progression of electronic trading to be most rapid in Asia's higher-volume, more developed markets of India, Hong Kong, Singapore and Korea. “The Tokyo Stock Exchange and Singapore Exchange have implemented new trading systems that can handle greater volume at a faster speed,” said Lamb. “China is relatively restricted and remains an extremely active prospect for overseas trading firms, while India has close ties to the Middle East, which is sure to open up opportunities there.”