While the U.S. and European Union have rules mandating that brokerages find the best possible price for clients, there are currently no equivalents in the Asia-Pacific region. That could change, however, as algorithmic trading, technology advances and buy-side pressure nudge the more developed economies in that direction.
“The buy side is taking increasing control of the trading process and the concept of best execution is gaining traction, although we are still some years behind the U.S., and to a lesser extent Europe, in terms of the availability of alternative trading venues,” said Gabe Butler, director of sales in Hong Kong for New York-based agency brokerage Investment Technology Group (ITG). There are more than 40 alternative trading systems (ATSs) in the U.S., and a bevy of platforms have been launched in the EU since the Markets in Financial Instruments Directive (MiFID) became effective late last year.
Australia
In Australia, the Investment & Financial Services Association–a trade group representing buy-side firms–issued guidance in 2006, but the country has not yet made best execution a regulatory requirement. Brokers, however, are taking the idea seriously, due in part to buy-side demand.
Steven Hammerton, head of portfolio trading and direct execution at UBS Securities Australia in Sydney, noted that “UBS has been strictly in compliance with best execution, and we think it’s something very important to our clients. We’ve been investing heavily to achieve best execution.” Hammerton pointed to the firm’s algorithms, which are “written in a way to help you achieve best execution in a fast-moving market.”
The growing use of algorithmic trading and direct-market access (DMA) in Australia this year has increased volatility and widened spreads, which “has resulted in the standard deviation of estimated trading cost more than doubling,” said David Broadfield, analyst at ITG and author of a recent report on Australian market microstructure. “This highlights the importance of execution to the overall investment process and the potential danger of failing to adopt best-execution practices.”
Fund managers need to pay attention to hidden costs, said Michael Corcoran, ITG’s Sydney-based director of trading. Research shows that obvious costs–broker commissions and tax–are staying close to 18 basis points, said Corcoran, whereas hidden costs raise that to 48 basis points. “They will have to more aggressively reduce the hidden costs within their portfolios if they want to stay in the game,” he said, adding that advanced trading methods can help bring those costs down once they are identified.
The game is about to change in Australia, as regulators are expected to open the Australian Stock Exchange up to competition from ATSs. Among those waiting for final approval are the AXE electronic communications network-owned by the New Zealand Exchange and a consortium of investment banks–Liquidnet Australia and Instinet–backed Chi-X.
“With the regulatory changes, there will be more electronic exchanges in the future,” said UBS’s Hammerton, adding that his firm will be well positioned to seek liquidity from those destinations. “We have invested in smart-order routing technology and will be able to offer clients smart DMA, which routes to the exchange with the best price,” he said.
Japanese ATSs
In Japan, “buy-side firms still have to go through brokers because direct connections to the exchanges are not available inside Japan,” explained Neil Katkov, Tokyo-based head of Asia research for Celent. “Less competition leads to an opaque market, where investors can’t be well protected.” For example, he said, several large local brokers are internalizing trades and benefiting from wide spreads.
“There is not much in the way of best-execution regulation, like in the U.S. and Europe,” said Katkov. Japan’s Financial Services Agency is only now beginning to make such initiatives a priority, he added, recently passing execution rules that will protect participants in pension plans. The regulators, however, are looking at adopting broader rules, in the style of MiFID or Regulation National Market System in the U.S.
Until then, the buy side will continue turning to alternative trading platforms, noted Katkov. Asia’s first crossing network, JapanCrossing, was launched in 2001 by New York-based agency broker Instinet, which is now a subsidiary of Nomura Holdings. But such venues–called private trading systems in Japan–have not been able to grab more than a 1 percent market share due to the existing exchanges’ chokehold.
Still, platforms such as Japannext and Monex Nighter are seeing increased volumes and vendors including MetaBit, TradingScreen, Tora Trading Services and Bloomberg are offering advanced connectivity. “Trading on such platforms is increasing because it gives buy-side investors a choice among quotes and, therefore, potentially better execution,” said Katkov.
No Plans in Hong Kong
DMA is available in Hong Kong and algorithmic trading is in demand, but best-execution regulations are not yet in the works. In a June speech, Martin Wheatley, chairman of the Hong Kong Securities and Futures Commission (SFC), noted that Hong Kong doesn’t need a Reg NMS because “we do not have alternative trading venues here where investors can trade Hong Kong securities.” But, “given the trends in the marketplace and the advances in technology, the SFC and other regulators in the region do need to keep an eye on the international development of this issue.”
ATSs are allowed under the current laws, but a key concern “is the accompanying fragmentation of previously centralized trading,” continued Wheatley. “These types of trades contribute to reducing liquidity in the reference market, simply by virtue of the fact that fewer orders get posted there. This in turn raises difficult questions about the extent to which the broker’s client is really achieving best execution.”
BlocSec operates a pan-Asian block trading platform that went live in Japan, Singapore and Hong Kong in May. Ned Phillips, CEO of BlocSec, a subsidiary of Hong Kong-based CLSA Asia-Pacific Markets, said that he sees growing interest in alternative platforms in Asia. BlocSec, which currently has 75 clients in Hong Kong, plans to expand to Australia and Korea next.
Ben Kwong, COO of Hong Kong brokerage KGI Securities Co., said that local brokers are “heavily investing in trading technologies.” KGI, for one, plans to invest HK$30 million ($3.8 million) this year to improve its trading platform because “it is the best way to save money,” said Kwong. “The average trading cost in Hong Kong is about 25 basis points, compared with 15 basis points with electronic trading.”
Korea Slow to Change
In Korea, best-execution rules are still in the distant future. Instinet and Samsung Securities in March launched Korea’s first crossing network. In July, Investment & Securities Co. became the country’s first firm to offer algorithmic trading capabilities to international clients, adopting event processing technology from Progress Software Corp.’s Apama division. Algorithms have yet to be widely adopted in the market, according to Gyun Jun, analyst from Seoul-based Samsung Securities.
Source: SecuritiesIndustry.com, 22.09.2008 by Wang Fangqing see full report at Securities Industry News
Filed under: Asia, Australia, Exchanges, Hong Kong, India, Japan, Korea, Library, News, Singapore, Trading Technology, Algo Trading, Asia, ASX Australian Stock Exchange, ATS Alternative Trading Systems, Australia, BlocSec, Chi-X, DMA Direct Market Access, HKEx Hong Kong Stock Exchange, Hong Kong, India, Japan, Korea, KRX Kores Stock Exchange, Liquidnet, MetaBit, Regulation, TSE Tokyo Stock Exchange
