Several Asian markets began to open to tougher competition and overseas investment in 2010. Steve Wood, founder of consultancy Global Buy Side Trading Consultants, expects the year ahead to witness new venues fighting for domestic market share in Australia and Japan as Hong Kong and Singapore vie for the title of leading Asian financial centre.
“For the buy-side, looking east is an important part of the picture,” he says.
The question is no longer whether to locate in Asia, but where. The tough regulatory environment in Japan and Australia's geographical remoteness tend to count them out as a centralised trading location. That leaves Hong Kong, increasingly a gateway for the vast but hard-to-access Chinese markets, and Singapore, a cauldron of innovation, as the two most likely routes into the region. “If you’re only handling Japanese offshore money or a mixture of onshore and offshore money there’s a good argument to centralising your pan-Asian trading hub in Hong Kong or Singapore,” says Wood, formerly global head of trading at Schroder Investment Management.
In the former, small but important steps are being taken to facilitate international trading into and out of mainland China. Market practices are being normalised and interaction with the mainland is being opened up. There has been a push in Asia to move market times closer to those seen in other markets, with Hong Kong shortening its two-hour lunch break to 90 minutes in 2011 and planning a further reduction to one hour in 2012. “The mainland markets are adjusting their market hours as well, so while the Chinese move at a more majestic pace than we do in the west, over the next two to three years you will see Shanghai, Shenzhen and Hong Kong harmonising,” he says. “They’ve been asking brokers in Hong Kong to set up renminbi accounts so, reading between the lines, there may be a more flexible approach [in Hong Kong] to mainland investors.”
The Singapore Exchange (SGX) is continuing to innovate to attract trading firms and liquidity, not least through its joint venture with Chi-X Global to establish Chi-East, a pan-Asian dark pool that launched on 11 November. It has also entered into merger discussions with the Australian Securities Exchange in a move that would create the world's fifth largest exchange, with a combined market capitalisation of US$12.3 billion. The merger is still awaiting approvals from shareholders and regulators but is currently on track to go ahead in Q2 2011.
At a product level, Wood believes that SGX's recent initiative to facilitate trading in US stocks during Asian hours is revolutionary. “People think they are ADRs (American depository receipts) but they're not,” he says. “They are fully fungible with the stocks in the US, denominated in dollars. So you can buy one of these stocks on the SGX and it's deliverable by [US clearing and settlement utility] The Depository Trust Company.”
Wood believes this is a step toward creating a global marketplace for US stocks. “If you have any M&A activity in a listed stock you could see the statistical arbitrage firms moving in or if liquidity does take hold on the SGX then it's got the same advantages of an ADR but a lot cheaper to trade,” Wood notes. “You could pick up on market information that would skew the stock the next day [in the US] and take advantage of it in Asia.”
Regulatory change is moving at a similarly brisk pace as product innovation across the region, with priorities set by the Group of 20 augmented by changes to national market infrastructures. “The G20 is still looking to potentially create a more harmonious global regulatory environment so, as in the west, we can expect regulators in Asia to continue to focus on dark pools, high frequency trading and data collection,” says Wood.
In addition, both Japan and Australia are opening up to greater levels of trading venue competition, with the latter using the impending arrival of new exchange operators as the catalyst for a thorough reexamination of equity market structure and practice.
Wood suggests Singapore and Hong Kong will be watching the results of the current consultation by the Australian Securities and Investments Commission with interest. “The Australian consultation paper CP 145 could potentially stoke up a furnace of regulatory change in the region,” he says.