South-east Asian (SEA) investors are increasingly looking to trade across multiple markets, driving the need for an efficient cross-border trading infrastructure. How far has the region progressed in the creation of this seamless regional trading environment? Regulations differ from one country to another, national exchanges are working on integrating processes and platforms, and market participants need to upgrade systems to offer multi-venue trading capability to their clients. Leading experts from SEA exchanges, SunGard and the brokerage community discussed key industry initiatives, and how technology will help deliver efficient cross-border trading platforms.
Moderator:
Anshuman Jaswal, Senior Analyst, Celent
Panelists:
Azura Azman, Head, Equities Broking, RHB Investment Bank
Adikin Basirun, Director of Technology, Indonesia Stock Exchange
Daniel Lee, Business Director, DBS Vickers Securities
J.J Lim, CIO, Bursa Malaysia Berhad
Fragmentation
In Europe, MiFID and cross-border trading has driven the fragmentation of the cash equity market. The market is crowded with electronic execution venues. Numerous business model of trading venues have emerged. The dark pool phenomenon is gaining significant traction.
Said Jaswal: “The competitive environment created by MiFID has also led to a significant decrease of direct transaction costs, but these are currently outweighed by indirect cost increases, driven by side effects such as market fragmentation and lack of transparency.‘’
However, Daniel Lee, Business Director at DBS Vickers Securities, pointed out that Asian markets are not as fragmented as those overseas, especially when one talks about transparency from pre- and post-trade perspectives: pre-trade, referring to whether the price one is getting is the best possible, and post-trade to whether what was actually done at trade level was guaranteed as the best solution. “That is a summary of MiFID’s definition of transparency in trading,’’ he said.
“In those markets, you can have several quotations for the same stock, so you do not know whether the price you are seeing is the best price possible. But in this market, what you are seeing is through exchanges. We don’t have multiple markets, with the exception of some degree of dark liquidity and some degree of off-market crossing.’’ In general, he added, Asian markets are less “sophisticated’’ and therefore, do not have the same problems as those in Europe and the United States.
Nonetheless, Jaswal says Celent expects a gradual but steady evolution in market structure and fragmentation. There will be limited disruption in the first two to three years, gradually increasing over five years. As new entrants gain market share, incumbent exchanges will benefit from an overall rise in trading volumes – by as much as 15% to 20% a year, primarily driven by economic fundamentals and high-velocity traders.
Lee added that what could happen is an evolution in SEA towards multiple listings of the same security on multiple exchanges, as is the case in Europe, leading to different pricings.
“The big difference is that, in Europe, to access that security, you are supported by the same set of regulations. But in this part of the world, I think the technology has got ahead of the regulation. In terms of regulations here, it’s very much like pre-MiFID, back in 1993 in Europe. It wasn’t till 2004 that Europe did away with the concept of whole state vs home state, leading to a harmonization of regulation. That is something I hope to see eventually in ASEAN.’’
Said Adikin Basirun, Director of Technology at the Indonesia Stock Exchange: “What’s important is that, in looking for opportunities and efficiency, there must be transparency and an understanding, should there be a dispute, on how to resolve it.’’
Rising Interest in Asia for e-Trading
Azura Azman, Head of Equities Broking at RHB Investment Bank, said: “e-trading in Malaysia is very new. Our clients ask for it and we, as brokers, meet their requirements by putting in the infrastructure. There is also interest now in multiple markets from our local institutions, so the demand for information for overseas markets has risen. Retailers are also very interested in overseas markets because they see that they can make money in the United States where volatility is more than in Malaysia.
“Because of these demands, we are looking into providing multi-market platforms for our clients, to provide efficiency and market data. While it’s still very new to Malaysia, I think a lot of brokers are now looking into this.’’
Lee agreed: “I think we are going to see a lot more foreign trades going in electronically. Now, with effective dissemination of information, people do not feel they lack information relative to their competitors elsewhere. A guy sitting in Malaysia will not feel he has less information than someone in Singapore.
He noted that cross-border trading was already happening in the 1990s. “I was trading in foreign markets with a phone. But obviously, volumes then were not so high. Today, a retail investor can access all the information he needs, thanks to technology.’’
Costs and other obstacles
Fragmented post-trade infrastructures require more intermediaries to settle cross-border transactions, which increases post-trade costs dramatically. However, the implementation of technology is also a major cost factor.
Said Azura: “Putting in an electronic platform is expensive. Brokers will ask which comes first: revenue or spending on infrastructure? So that’s a difficult decision for some of the brokers in Malaysia, especially since volumes and revenues have come down. But I think some foreign brokers are actually offering cheaper alternatives to local brokers to access multiple markets. That could be an opportunity for our local brokers to make multi-market offerings to their clients.‘’
JJ Lim, CIO at Bursa Malaysia Berhad, also noted the challenge brokers face in volumes not being high enough to justify investment. This leads to a lot of transactions being done manually.
“This then requires a harmonization of rules, especially when it comes to the repository. This harmonization will evolve but the order of importance seems to be first trading and then post-trade. We might want to look at fast-tracking the area of post-trade, as it’s a significant factor.’’
Post-trade infrastructure initiatives
ASEAN countries are building an order routing link to allow trading through a single access point for issues by the stock exchanges of Singapore, Malaysia, Thailand, Indonesia, and the Philippines. The ASEAN Trading Link Initiative also plans to link the clearing houses of the five ASEAN countries, enabling their clearing houses to act as central counterparties that can clear and settle cross-border trades among them.
Said Adikin: “The ASEAN linkage initiative is a part of the commitment from our Finance Minister to have more cooperation between Asian countries by end 2015. We already have cross-border trading initiated by brokers from one to another place. But with this initiative, one aims to bring up the gross order trading to the exchange level.’’
He also expressed the intention to make ASEAN securities an attractive asset class for foreign investors, especially those from the US and Europe. “If these investors look at each ASEAN country individually, they may find it is too small for them. But if we can join together as one asset class, it might be much more interesting for them. There should be a joint effort to promote ASEAN as one region that offers better opportunities to the European and US investor.’’
Anshuman also noted that the Singapore Exchange is putting in place new post-trade systems for equities and derivatives while Japan will be launching off-exchange clearing in July 2010 by JASDEC – a revolutionary step in the region to facilitate more alternative liquidity venues and growth in PTS volumes.
But as these developments take place and the world starts taking more interest in Asia, there is a need for a unified regulatory framework. All agreed that this would be a long time coming.
Said Adikin: “That challenge will take time. The EU took a long time. I think we will take a longer time. We can learn a lot from them.’’
Lim added : “A professor from MIT once noted the difference between the US and EU and Asia and China. He pointed out that America is a union of states, and the European Union is a union of countries. Asia is very far from that. So we are now just only talking about whether we can adopt this model at ASEAN level. The fact that we are trying to come together as a whole to discuss regulation is a good step forward. But I can’t see this happening for at least another five years.’’
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