Buy-side traders in the Asia-Pacific region are turning increasingly to advanced trading techniques to cope with the wider spreads, lower liquidity and less predictable volume trends seen in the past three months, according to Khaleel Mohideen, director and head of advanced execution products for Asia ex-Japan at Credit Suisse.
Execution algorithms that allow traders to hide their intentions have proven particularly valuable. “The key concern under conditions like these is signalling risk,” Mohideen
told theTRADEnews.com. “Stealth tactics prove very useful to clients wanting to get out of or into a position by limiting signalling risk, seeking liquidity and being active in the names or prices where liquidity is available.”
Hiding trading intentions has become particularly pressing in the tough conditions that have prevailed since US investment bank Lehman Brothers went bankrupt on 15 September. Thin liquidity on Asian order books is making large orders easier to spot, increasing execution costs. According to a recent Credit Suisse study, ‘Which tactics perform best in chaotic times’, touch sizes (best bid/offer quantity as a percentage of daily volume) on Asian markets between 15 September and 3 November were half those seen between 15 August and September 12.
“A $10 million or $20 million order is going to be harder to do because liquidity has dried up,” Mohideen told theTRADEnews.com. “You might be 60% or 70% of the market volume, where before you were 5% to 10%.”
Clients are also combining trading strategies to cope with high volatility. “The intraday volatility in some Asia-Pacific markets has increased considerably and that becomes very difficult when you are looking at a VWAP benchmark,” said Mohideen. “Clients are spreading order flow throughout the day or using multiple tactics – for example executing 30% in-line and spreading the rest over the day – to minimise slippage and execution costs.”
Non-displayed liquidity is also growing in importance in the current conditions. “There is definitely more use of dark pools and we have seen more clients connect to CrossFinder+ [Credit Suisse’s dark pool]” said Mohideen. He added that there is also a greater demand for customising algorithms. “Clients want to tweak their tactics for use in these markets,” he said.