While Asia-Pacific lacks an equivalent of Europe’s MiFID or the US’s Regulation ATS, there is still strong impetus for the
development of alternative trading venues in the region, according to John Lowrey, CEO of trading platform operator Chi-X Global.
A number of alternative trading venues have established a presence in Asia’s biggest markets, including buy-side focused crossing networks BlocSec, Liquidnet, Instinet’s CBX and ITG’s POSIT, but barriers to entry are many. Asia’s alternative platforms have to report their trades through local exchanges, for example, or register as brokers, depending on the restrictions of the individual markets.
Access to clearing and settlement functions can be a particularly high hurdle for firms wishing to establish displayed-order-book trading systems along the lines of Europe’s multilateral trading facilities because of the vertically integrated models operated by the Asia’s leading exchanges.
But Lowrey is confident that the barriers will be broken down. “There is no single catalyst to force competitive trading or break down vertical silos, but we do feel that there is a recognition now by market participants that the cost of trading in Asia is much higher than it need be and that there is enough of a positive regulatory view and existing legislation out there to allow new venues to come to the marketplace,” he told theTRADEnews.com.
MiFID, introduced in November 2007, permitted the formation of MTFs in Europe to compete with incumbent exchanges. Regulation ATS, which came into force in 1999 formally opened up the US’s exchanges to competition from alternative trading venues.
Some Asian exchanges have displayed an understandable reluctance to open their equity markets to competition – the Australian Securities Exchange being a particularly vocal opponent of alternative platforms – that is at odds with the stance of Asia’s financial regulators.
“Regulators and government officials are very cognisant of the challenges of trading in the Asian marketplace. Frankly we see regulators and officials being much more proactive around market structure changes than people would think,” said Lowrey.
Chi-X’s Global’s recently announced joint venture dark pool with the Singapore Exchange (SGX) appears to lay the foundations for a pan-Asian alternative trading venue. In addition to SGX-listed stocks, the new pool will also trade shares listed in Australia, Hong Kong and Japan. The two firms also plan to create a pan-Asian central counterparty (CCP) clearing service to process the non-SGX trades.
“In most marketplaces, a new trading venue will either need to clear trades on a CCP controlled by the incumbent exchange or a new CCPs to be opened up,” said Lowrey. “This is why in our joint venture with SGX we have focused simultaneously on both the transaction piece and the CCP and settlement area.”
However, establishing a pan-Asian CCP will be no mean feat because such an entity would need to link into the relevant countries’ central securities depositories (CSDs) for settlement, many of which are controlled by incumbent exchanges.
As Chi-X Global is currently engaged in a request-for-proposal process with post-trade providers, Lowrey declined to comment in detail on how such links would work.
“It is unlikely that any single entity can do everything, mainly because you have multiple CSDs in multiple places and you have to harmonise those and have them talk to each other from a risk management perspective, so it is going to take some teamwork and coordination among infrastructure providers,” he said. “The great news is that there are a number of world-class infrastructure providers who are very interested in expanding in Asia and being a part of what we are trying to create.”
While volumes traded on alternative venues in Asia-Pacific are currently small, many expect them to grow rapidly in the next few years. Research and consulting firm Aite Group estimates that alternative platforms will account for 20% of the total equities volume in the region by the end of 2012, compared with less than 5% currently.