In Japan, by 2008, the majority of trading was already through electronic channels. There is also a trend, within that flow, for more algorithmic execution and less ‘point-and-click’ DMA.
In Hong Kong around 28% of institutional flow was electronic with two-thirds of it DMA. However, this data is a more than a year and we would expect to find a greater share for algorithmic solutions today. Singapore, Korea and Taiwan show similar figures and trends: around 25% being electronic and a slow trend within that flow for more algorithmic trading at the expense of DMA.
Key points of the session:
- ‘Arrowhead’ has made the TSE globally more competitive but competition from alternative venues is now increasing.
- Access to China is still hindered by the limitations of the QFII quota.
- Regulatory inconsistency and restraint is, in most of Asia, holding back progress.
- But a unified regulatory system is unlikely in the near future.
- Dark pools in the China market, while unlikely soon, are ultimately inevitable.
Speakers:
- Adam Sussmann [MOD] – Moderator – Head of Research, TABB Group
- Christian Chan [CC] – Director of Electronic Execution Sales, CLSA
- Dan Weil [DW] – Managing Director, Head of North America Equity Sales & Trading, Shenyin Wanguo Securities
- Mark Volker [MV] – Senior Vice President, SunGard Trading
- Ofir Geffen [OG] – Director and Head of Research Group, Asia Pacific, Investment Technology Group
- Oliver T.K. Ng [ON] – Executive Director and Responsible Officer, BOCI Securities Limited
In the markets that you are servicing where do you see the most change in electronic trading?
CC – Most recently, since the start of 2010, Tokyo has been a big focal point with clients trying to trade that market; it has come, of course, with the upgrade of the Arrowhead system on the Tokyo stock exchange (TSE). This has increased the TSE’s speed and the number of orders it can handle. Fill notification times have come down from three seconds, before ‘Arrowhead’, to 25 milliseconds now, bringing Tokyo in line with the US and Europe.
Has the upgrade also resulted in a decline in transaction costs? Has there been a cost benefit to investors?
OG – Yes we have found that, not only due to ‘Arrowhead’ but also changes that came with it, there was a reduction in spreads, there were increased volumes, and we definitely saw a reduction in transaction costs. So we’re seeing a lot more volume being transacted on the TSE. However, with the development of other venues like Kabu.com and Jappannext we have also seen some flow going there.
Are investors well-connected to the alternative trading venues in Japan?
MV –There are always early-adopters and there are always laggers. Ultimately, brokers will not be competitive if they do not access the full local liquidity that is available. If investors can’t get good execution quality and low transaction costs they will go elsewhere – lagging brokers will be irrelevant.
In China the challenge is in being able to access the market at all. Are there investors that want to trade in the Chinese market that are being held back by technology or regulation?
ON – The biggest obstacle for foreigners wanting to invest in China is that they are required to have the QFII quota. QFII is hard to obtain and, as a result, the amount of flow into China has been limited. Having said that, some of the institutions that do have the quota are sending order to China electronically but most trading is done through Bloomberg terminals.
DW – I think SWS is currently the only firm with fixed-connectivity DMA access directly into the A-share market. Although the market is nascent it is developing quickly. However, demand to trade in Chinese markets will be largely unsatisfied until the RMB floats.
ON – In some ways we may feel that China is ‘behind the curve’ when compared with the other exchanges, but there are also relative advancements. In China buy-side orders in the A-share market are placed directly with the exchange so, in essence, the execution broker provides an open gateway. Another example is the transaction size of the market, the Shanghai and Shenzen stock exchanges are already handling massive daily transaction volumes although in terms of dollar-value this might not appear so significant.
OG –It can sometimes be an advantage to join late. You don’t have an infrastructure legacy; you don’t have to convert from old technology to new. The Chinese, the Indians as well, indeed, the whole of Asia, have the chance to learn from the mistakes of the US and Europe in terms of regulation and technology. We are certainly going to see changes in India, but there are issues around regulation.
How important is it for Asian markets to create a more homogenous set of trading rules and clearing- and settlement-infrastructure?
MV – It will happen naturally. Anything that is a hindrance to the ability to attract capital is friction –a smooth process stimulates trading, stimulates demand, and stimulates growth of the economy. All the ingredients are there and now we’re in the technology adoption phase. There is tremendous demand to have access to these markets; they want to invest their capital in these markets and, as I said, anything that stands in the way of that is just friction.
Do you see any catalysts occurring in Asia that might shift market share from any of the regional exchanges?
OG – In the US market dark pools took some time to catch on; there were few until the mid-90s when there was a big jump that came with the advent of algorithms. Although algorithms have arrived in Asia what we don’t have is the backing of the regulator. It is up to the legislators to step in and decide if they want competition between venues. Without that backing from the regulators we will still see some development of alternative venues but they will not be truly competitive.
Is there any chance of dark pools in China?
ON – I would see the chances as very slim.
MV –I think ultimately what happens when you have more market participants, greater retail flow, tighter spreads, and smaller price-points, large institutions find have difficulty with block-trades. There are two ways to address this problem and I don’t think they are mutually exclusive: one is the greater adoption of technology and the use of algorithms and the other is the creation of a venue that facilitates large-block trading with minimal market impact, and that’s a dark pool. Ultimately I believe you will see the adoption of both – the markets will get to a point where it’s just a logical conclusion to have dark pools.
DW – Logically, I agree but there are serious obstacles to it happening. From a regulatory point of view, and more so from a control point of view, I don’t think the Chinese government and the CSRC would want things to occur that way.
MV – I don’t mean to say that it would preclude the participation of or even ownership of the dark pool by, the regulators. I just mean that a need is there that is not going to diminish, that institutional investors need to trade large blocks without market impact.
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