Andy Ho, head of trading for Asia-Pacific (APAC) at Deutsche Asset Management, has been making waves in the industry through his endeavours to build the best in-class trading desk for the region. He is regarded as one of the best up-and-coming talents on the buy-side, with experience spanning trading and portfolio management at major institutional organisations. During the three years he spent at BNY Mellon Investment Management, Ho managed to triple volumes and build out the firm’s platform to trade multi-asset classes.
He stresses the importance of the Chinese market for a buy-side’s trading operation in APAC. In 2016, the Chinese market accounted for 60% of the region’s trading volume. This, in part, is due to review of restrictive measures put into place following the global financial crisis. “The low volatility in the Chinese market last year afforded the regulators to reassess the restrictive measures that they put in place after the crash. Many of them were eventually lifted,” Ho says.
Regulation in Asia is ever evolving and contrasts greatly from regulation in the US and Europe from a maturity standpoint. Ho believes China is turning a corner, which is seen in the most recent increase in the index futures limit. Authorities relaxed the rules on transaction size and trading costs for stock-index futures. Ho says these changes, partnered with the launch of the Shenzhen Hong Kong Stock Connect, have had positive impacts on liquidity.
The Shenzhen Stock Connect was established in December, and together with the existing Shanghai Hong Kong Stock Connect, foreign investors have been handed access to the Chinese onshore market, and vice-versa for domestic mainland investors. “It has been a huge boost to the market this year, with large outflows from the mainland into Hong Kong,” Ho explains. “The Hang Seng index has increased 8% year to date, which makes it one of the best performing markets in the world.”
Further developments include the launch of a closing auction session in Hong Kong, which gives traders an extra 10 minutes trading at the closing price. The initiative was strongly supported by the industry. A consultation published just before its launch revealed 31 out of 41 exchange participants in Hong Kong - which represented 60% of market share by turnover of securities market - agreed with the idea of a closing auction.
“The introduction of the closing auction last year was universally well received and we have seen a spike in volume at the close of market and passive mandates with close as benchmark are comfortably trading there,” Ho says. He adds that all of these regulatory changes have been positive effects on liquidity in APAC, particularly China.
As the APAC region reaps the rewards of a more relaxed stance on certain regulations, Europe remains on the cusp of implementing MiFID II, due to have a profound impact on the investment management industry globally.
Ho notes research revenues across APAC have already decreased over the past two years. This will likely continue to decline following the implementation of unbundling as asset managers are forced to justify the cost of research they pay.
Some of the largest and most active investment management firms in Asia have global footprints and sizeable operations in Europe. Those firms have been tasked with ensuring compliance with MiFID II’s unbundling requirements.
Fragmentation across markets in Asia has led to regulators not pursuing similar rules as in Europe. For those larger buy-side firms, local regulatory environment is now less of a concern.
The Asian Securities Industry & Financial Markets Association (ASIFMA) established a dealing commissions working group to tackle the issue and it raised concerns of the impacts of unbundling on the Asian fund management community. A key concern for the buy-side is the burden of determining and calculating the price of research. Many have expressed concerns unbundling will see significant additional costs at a time when margins are under extreme pressure.
“I think bulge bracket banks can no longer cross-subsidise their execution with large research revenue and they will need to take a hard look at where they will continue to invest. That will lead to some tough decisions for which markets they scale back or pull out of completely due to the high quality in this region and compressed margins.
“We are seeing some key players pulling out of APAC in the equity market and if regulatory requirements continue to drive down trading margins across the region, we can expect to see more firms pulling out of the market in next two years,” Ho explains.
Barclays is set to cut a large number of its equity business jobs across APAC as it moves forward with rigorous cost-cutting plans. The bank is also reportedly looking to shut down its investment banking businesses across South Korea and Taiwan. Similarly, Standard Chartered shut down its cash equities and equities business in Hong Kong, which resulted in more than 200 job cuts across the region. Again, Standard Chartered is aiming to cut more than $400 million in cuts, in a bid to reverse a decline in profits.
However, Ho adds local players could benefit from this and sell-side firms with technical innovation could begin to compete with lower costs. “With the big buy-side firms no longer bound by commission sharing agreements, I think there will be a more level field for sell-side firms regardless of size to compete based on best execution.”
Looking forward, Ho believes block trading will be key for the trading desk and it’s something he says he is keeping a close eye on. “With the passive mandates continuing to grow, we see a reduction in overall liquidity across the region, so it’s critical for our trading desk to be connected to key sources of large natural liquidity,” he says.
Block trading has seen an increase in demand following the European authority’s decision to measure daily dark pool and off-order book trading levels to determine which stocks will be affected by. from January 2018.
MiFID II will see an even greater uptake in block trading with more pressure on broker crossing networks. The buy-side is consistently calling for new and innovative trading capabilities.
Ho notes the initiatives already available in Europe and hopes promising developments and technologies, like Turquoise Plato, will be made available to the APAC region in the near future. The London Stock Exchange’s Turquoise Plato is aimed at developing efficiencies in the European equities block trading space, including reducing costs and offering deeper liquidity.
The political events in 2016 had an impact on markets globally. Donald Trump’s election in the US and the UK’s decision to leave the European Union tested the global market’s resilience.
At Deutsche Asset Management, the trading desk is anticipating even more volatility than originally seen as Trump’s policies and the Brexit negotiations begin to unravel. Ho explains: “Looking forward with more details of Brexit and Trump’s policies coming out, as well as other major political events this year with elections across Europe, we definitely expect a more volatile market ahead.”
To deal with this, the trading desk is looking to expand its efforts to streamline and automate the trading process. “In the case of market turbulence, our traders will have more capacity to deal with the difficult trading environment and also have more capacity to communicate with portfolio managers effectively, which I think will be crucial in times of market events.”