A year ago, traders and technology vendors in Asia were riding a growing wave of liquidity and technology adoption. Direct market access (DMA), alternative trading systems (ATSes) and crossing networks steadily increased throughout the region as regulatory barriers began to fall away. While the financial crisis is putting a damper on the party, don’t expect opportunities in Asia to dry up, experts say.
“Asia is on a path of evolution that is going to converge eventually with the technology in the West,” says Neil Katkov, the Tokyo-based managing director of the Asia research group at Celent, a global financial market research and consultancy. With many traders and brokerages tightening their belts, adoption may slow, he says, but it will not disappear.
The opportunities are greatest for Asia’s exchanges themselves, which could take advantage of the slowdown to improve their own technology and compete with some of the trading networks that have been entering the region. “I think we’re going to see more of a realization from the exchanges that adopting modern technology is a competitive imperative,” Katkov says.
CONTINUING GROWTH
While algorithmic trading and order management systems (OMSes) have continued to grow in the region, the trends that attracted the most attention in 2008 were trading networks and DMA capabilities. Regulators in the region spent much of the year grappling with how to accommodate the dark pools, crossing networks and off-exchange trading platforms that were arriving and expanding.
These networks have been driven in part by an expansion of asset classes. A wide range of investors has been diversifying, adding new products into their portfolio. “Traditional buy-side firms such as pensions are starting to look into over-the-counter (OTC) derivatives, commodities and foreign exchange (FX),” Katkov says. “More products are being traded more frequently by more types of people.”
Local brokerages are also starting to make a difference, says Nevin Price, regional manager for Asia at Fidessa, a global trading systems, market data and connectivity solutions vendor. Aiming to compete with larger international firms, local brokerages are looking to adopt the newest technologies and gain access to new markets. As markets tighten, brokers want to keep costs down, and technologies that help to streamline trading and provide easy access to exchanges have been on the rise.
Many of these brokerages had their options expanded in the last year. Joining Liquidnet and ITG, which have been operating crossing networks in Asia since 2007, a new network entered the market.
BlocSec, an Asian electronic crossing network that opened in May and is owned by brokerage CLSA, now has 70 customers and operates in Hong Kong, Japan and Singapore. Liquidnet and ITG’s Posit network have also expanded their networks in the region. Still, with only a handful of players, there is ample room to grow.
“While dark pools have exploded in the US, they are still at their beginning stages in Asia,” says Ned Phillips, CEO of BlocSec. “I really think the more platforms the better in Asia, as it will grow the market but will not result in the fragmentation seen in the US.”
Crossing networks have an easier time entering Asia, as they don’t require a wholesale change in regulations, says Katkov. The arrival of DMA and the push of alternative trading networks, however, signal the loosening of some regulatory barriers in the region. “India has just allowed DMA this year and Australia is considering allowing off-exchange trading,”
A CHANCE TO COMPETE
While regulatory changes opened up markets in the past year, the financial crisis could prompt some exchanges to act defensively, blocking the incursion of off-exchange trading platforms and other networks that could cut into their liquidity.
Exchanges have taken defensive positions in the past, like Australia as a recent example. While three off-exchange networks have applied to operate in the country, a call to review the regulations governing exchanges in the country has delayed the process for more than a year. Malaysia has also delayed allowing DMA on that country’s exchange.
Sang Lee, co-founder and managing director of Aite Group, an independent research and consultancy firms focusing on the financial services industry, says he believes the economic slowdown will help Asia’s exchanges view the competition in a new light. “Ironically, with all this mess happening the exchanges themselves are in great positions,” Lee says. “In the Asia market, real competition has not happened yet. All of the exchanges in Asia have the opportunity to become more innovative and more aggressive and competitive against some of these new smaller players.”
Many of the problems of the financial crisis appeared in the OTC market, Lee points out, which do not boast the transparency that traditional exchanges offer. “All indications are that we will see a heavier hand in terms of regulation in the coming year,” he says. “The global exchange market will have a lot of opportunities to take advantage of that.”
This is an opportunity that is unique to Asia. In Europe and the US, traditional exchanges are already losing significant amounts of liquidity to alternative trading venues. “For the European market it might be too late already,” says Sang. “But in Asia, exchanges have the chance to come out ahead.”
Exchanges in Asia could move to beat dark pools at their own game, offering their own alternative-type trading venues. Partnering with already-established networks in the West such as Chi-X could be another strategy Asian exchanges employ in the future.
“These are defensive moves, but not in a conservative way,” Katkov says. “Instead, they are trying to embrace new technologies and attract the most efficient services they can. I think that is the type of defensive move we’re more likely to see.”
Source: Waters Online, by Lauren Hilgers 06.01.2009
Filed under: Asia, Australia, Exchanges, News, Trading Technology, Algo Trading, Asia, Asia Strategy, Australia, BlocSec, BSE Bombay Stock Exchange, Bursa, Chi-X, DMA Direct Market Access, Economic Crisis, Exchanges, Fidessa, Financial Crisis, FIX, HKEx Hong Kong Stock Exchange, Hong Kong, India, Japan, Liquidez, Liquidnet, Malaysia, MetaBit, OSE Osaka Stock Exchange, SGX Singapore Stock Exchange, Singapore, Trade Connectivity, Trading Network, TSE Tokyo Stock Exchange, US Financial Meltdown
