With investment appetites turning towards Asia, both buy-side and sell-side firms are being confounded by the complexities of trading in a fragmented marketplace. In the face of such diversity, many firms are looking to new technology to level the playing field.
Fragmented by geography and varying regulation from country to country, Alexander Tabb, a TABB Group partner said the complexities of trading Asian markets demanded greater communications resilience and redundancy.
“Over the last few years, selected markets have fragmented following individual legislative efforts aimed at fostering competition within selected national boundaries,” said Tabb. “In both Japan and Australia, legislative and regulatory reforms have increased market competition, adding new order types and exchange venues in a relatively short amount of time.”
Within the Asian market, with the exception of Japan, there are currently 22 different electronic venues.
“Fragmentation or separation tends to follow national boundaries. This challenges the existing connectivity models, as it requires individual solutions for individual national markets,” said Tabb. “While separation is today’s challenge, we believe that as Asia becomes more automated and better integrated into the global trading community, internal and external pressure to increase competition and drive down costs will push individual nations to fragment on a case-by-case basis, complicating an already difficult connectivity model even further.”
This meant while individual Asian markets remained separated and began to fragment, it would become more challenging to maintain and sustain the internally-controlled and managed connectivity strategies relied on for individual point-to-point connections.
“An extranet service provider (ESP) can provide that connectivity on demand, eliminating the need to internally manage a costly network of point-to-point connections,” Tabb said.
Whether trading equities on the Hong Kong Stock Exchange or hedging US dollar interest rates in Singapore, Tabb said firms needed to restructure their infrastructure using extranets to manage connectivity.
TABB research estimates that extranets and extranet connectivity will capture 45% of US$5.2 billion global sell-side spending on communications in 2012 as firms realise it is no longer feasible to manage their own network of direct connections for trading different asset classes in Asia through their brokers.
“Whether it’s a small buy-side firm looking to connect to its brokers or a large sell-side bank that wants to reduce the operational complexity of its communications infrastructure and connect to the broader financial services community, extranets can serve all of these scenarios with minimal, up-front investment and the option to add capabilities on demand,” said Tabb.
“Over the last 10 years, we have witnessed a revolution within the trading community, one in which firms of all sizes are actively involved in trading a wide range of instruments at a variety of execution venues all across the globe. The idea of a 24 hour-a-day market place is no longer a fantasy, but a reality, creating unparalleled opportunities,” he added
In response, extranet service providers were scaling to match the market’s complexity, allowing participants up and down the service stack to communicate with each other via a reliable, robust and secure infrastructure.
“ESPs are providing market participants with the unique ability to bridge the geographic divide that exists between the developed markets in North America, Europe and Asia, and the emerging and frontier markets that are attracting so much attention,” he said.