Electronic trading volumes grew rapidly in Asia between 2004 and 2007, as more exchanges developed and enhanced the functionality of their trading platforms, according to a new report on buy-side execution of securities trades from research and advisory firm Celent.
Hong Kong saw particularly strong growth, with the value of securities trades executed electronically increasing at a compound annual rate of 71% from $403 billion in 2004 to $2 trillion in 2007. Over the same period, Australia’s electronic trading volume leapt 43% year-on-year from $393 billion to $1.1 trillion, and Japan’s rose 25% from $3.2 billion to $6.1 billion.
As well as technology investment by exchanges, Celent cites wider adoption of the FIX protocol, development of direct market access and algorithmic trading tools, and demand from non-domestic firms, as key factors in the overall increase in electronic trading volumes.
However, the report also noted that the global financial crisis halted the upward trend in 2008 – electronic trading values dropped 31%, 24% and 15% in Hong Kong, Japan and Australia, respectively.
The report said that algorithmic trading is becoming more widespread in the Asia Pacific region. According to Celent, there was a six-fold increase in Asian algorithmic trading levels in 2007, with around 15% of all buy-side orders executed by execution algorithms on average across the region. Algorithms are used to improve execution, aggregate flow from multiple venues and reduce market impact, the report said.
Direct market access (DMA) usage in the region has also increased. In Japan, for example, Celent found that DMA usage had grown to 8% of all equity transactions in 2007, compared with 3% in 2006. By contrast, DMA accounts for between 15% and 18% of trading in the US and 8% of trading in the EU.
However, the report added that a number of factors, including regulation, limit the effectiveness of DMA in Asia. Many countries, for example, require brokers to manually route buy-side orders to exchanges, diminishing the traditional DMA advantages of anonymity and reduced execution times.
The report noted that the global credit crisis has reduced the buy-side’s ability to spend money on trading technology such as order and execution management systems. However, it added that, as the investment industry in Asia continues to consolidate and assets under management grow, firms will shift away from low-cost broker-supplied systems to more expensive vendor solutions.