The reorientation of sell-side business models from west to east has been overdone and is now due for a correction, says Matthew Perry, co-head of execution services, Asia, Société Générale Corporate & Investment Banking.
Many institutional and private clients have been investing more heavily in Asia due to the region's emerging markets exhibiting stronger GDP growth potential than western economies still hamstrung by the debts incurred in the aftermath of the global financial crisis. But Asia's trading volumes have drifted downward during 2010 as the region struggles to absorb this latest wave of foreign investment. The local and global brokers that geared up their Asian operations to handle a surge in business have found themselves scrambling for volumes to justify the cost of their recent outlay on technology and human resources.
“The commissions that the institutions are paying to the street have reduced dramatically,” says Perry. “Sell-side firms are having to reinvent themselves to survive. Agency-only firms, for example, are beginning to suffer as they struggle to differentiate themselves. And we're now seeing domestic brokers from Taiwan, India and Korea taking a regional execution role.”
An increasing number of firms from across Asia are following the example of the region's large indigenous banks, such as Nomura, Daiwa and Macquarie, by developing their execution capabilities beyond their national boundaries. However Perry says that some sell-side firms, even those with established Asian operations, are already reconsidering their level of commitment to the region.
“It's becoming very competitive and buy-side firms need to be sure that the firms they're doing business with today will still be there in five years. Some firms are already cutting staff and you will see more of that in the next few quarters,” he says.
Stephane Loiseau, SocGen's deputy global head of execution services, agrees that there may not be enough business to go round. “People see Asia as an area of growth that they should be present in, but it's clear that a lot of them are going to be disappointed,” he says. “There's just not the space for the number of sell-side providers entering the market today. Unless volumes expand massively in the next couple of years, you will see a concentration of providers based on who can provide quality service globally while also handling Asia's particular liquidity constraints and challenges.”
According to Perry, the winners on the sell-side will be the firms that understand the ”natural' liquidity fragmentation across the region's diverse markets and have the combination of electronic and sales trading capabilities to execute on trading ideas. “Liquidity fragmentation already exists in Asia by the very nature of its country-based markets. From an execution standpoint, trading in the region requires a significant investment both by the buy- and sell-side,” he says.
In Asia, SocGen leverages the firm's global investment in its Quantitative Electronic Services (QES) offering which provides advanced algorithmic trading, direct market access and direct capital access globally. QES forms part of the bank's integrated execution platform which also offers global program trading, ETF advisory and trading as well as sales trading.
SocGen now trades into 16 markets in the Asia-Pacific region, providing electronic trading services including algorithms in 11 markets following the global rollout of QES.
“Anyone who says that benchmark algos are all the same doesn't know what they're talking about. We can and do differentiate ourselves on an execution basis,” says Perry.
While the bank hasn't participated in Asia's sell-side hiring spree to the same extent as many other brokers that have expanded their Asian presence from a lower base, SocGen has nevertheless made a number of new appointments in both research and execution.
On the sales trading side, the firm has increased the headcount on its Greater China-focused sales trading team in HK as well as in Japan, where Akihiro Ohara has joined as head sales trading from Nomura.
In addition, SocGen has recently expanded the scope of its research capabilities in the Asia-Pacific region through its partnership with independent Japanese research house Japaninvest. The first new joint offering is SG Cross Asset Research – Ji ASIA, a new pan-Asian research tool for institutional clients. On top of the 125 blue chip and growth mid-cap stocks across Japan, Hong Kong, South Korea and Taiwan currently covered by Japaninvest, Ji ASIA will expand to include a wider range of Japanese and other north Asian small-caps. “Ji ASIA is a niche, quality product very much respected by the marketplace and by complementing SocGen's macro, thematic and quant research, we're bringing something very unique to the region,” says Perry.
The parallel development of its research and execution capabilities in the Asia-Pacific region is both in line with SocGen's global philosophy and the demands of local clients.
“Particularly when alpha is at such a premium, trading desks want ideas that are backed up with macro- and/or fundamental-based research. And because we also offer model-driven quant research, we're giving the trigger pullers on the buy-side a lot more to chew on,” says Perry.
According to Loiseau, the closer link between PMs and traders in Asia reflects both the low level of unbundling in the region and the diverse nature of individual markets.
“Unbundling scarcely exists, not just through being late to the game but also because the diversity of the markets makes the integrated research product very important,” he says. “In Europe, things operate at a more regional and sectoral level, whereas Asian markets tend to act much more independently of each other. This requires strong country specialists and strong links between research and trading.”