FiNETIK - Financial Industry Networked Thinking - Asia and Latin America

In a bid to attract investors, Asia’s new commodities exchanges are turning to technology providers for low-latency solutions and improved connectivity.
Within weeks of each other, plans for two new Asian commodities exchanges were revealed with much fanfare early this summer. Fully electronic markets are expected to open within the next nine months in Singapore and Hong Kong, and industry observers note that this signals a growing appetite for technology in Asia’s commodities exchanges.

While the two exchanges are still awaiting regulatory approval, commodities exchanges across the region have been improving connectivity and reducing latency in the last 12 months, and opportunities are increasing for investors looking to trade across a number of asset classes. Newcomers like Hong Kong and Singapore are hoping that easy and reliable access will help attract those investors to their fledgling exchanges. Building liquidity, however, could be an uphill battle.

“The popularity of commodities as an investment allocation opens up a broad opportunity for exchanges focusing on those types of instruments,” says Andy Nybo, a senior analyst at Westborough, Mass.-based research firm Tabb Group. Building liquidity is a long process, he says, combining demand for the products as well as incentives to trade them on a centralized exchange.

“These incentives cover a broad spectrum of categories,” Nybo says. “They can include financial incentives that lower the cost of trading, technology and systems that make the trading process more efficient, or access to new products and strategies that better meet the needs of the trading community.”

Growing Demand
Markus Gerdien, executive vice president of market technology at Nasdaq OMX, has had a front-row seat to the growing trend in Asia. In addition to the Hong Kong Exchange, Nasdaq OMX is providing technology to the planned Australian Financial and Energy Exchange, set to start trading before the end of the year.

The trend, Gerdien says, is driven by a combination of pressure from international brokerages and home-grown interest in more modern exchanges. Worldwide capital is now shifting quickly from one area to another, leading investors that may have previously specialized in one asset class to diversify. “Equity trading is a little bit challenged globally,” Gerdien says. “But commodities trading is booming, so capital is shifting quickly.”

Asia is a natural place for the capital to flow, as the region’s demand for commodities continues to grow rapidly. Local demand has also driven local interest in the exchanges. “I think local economies, in previous times, had a shortage of cash or a shortage of workforce,” Gerdien says. Today, however, local economies are more robust and able to create a fair amount of liquidity on their own.

Interest in commodities is coupled with the increasing automation of brokerages looking to trade on Asia’s commodities exchanges. The demand is both local and international. “I think all the international brokers have deployed [algorithmic strategies] for their trading, and the technology is becoming more and more available for local brokers and dealers,” Gerdien says. “The exchange itself needs to deal with an automated order flow that can be very high.”

The interest in commodities has galvanized a number of startups and increasing automation has led existing exchanges to re-examine their business models and trading platforms.

Opportunities On The Rise

The options for Asia’s new commodities exchanges today, argues White, are much wider than they were even 10 years ago. “The technology wasn’t in place to connect,” he says. “There needed to be separate order management systems, which make it difficult to trade into different exchanges.”

Now, traders can maintain their ties to larger, Western exchanges, while finding arbitrage opportunities across the globe.

“Connectivity and access are important for any exchange but there also needs to be latent demand for the products being traded,” Nybo says.

OMX’s Gerdien says that not every new exchange will prosper, but it is worth taking the risk to help support new ventures. He points to OMX’s success with the International Securities Exchange (ISE) as an example. “When they started six or seven years ago, they were three guys in a garage. We took a risk and provided them with our technology.”

Today, the ISE is a wholly owned subsidiary of Eurex and together they lead the world in individual equity and equity index derivatives.

Asia is offering opportunities to vendors that could be as promising as the ISE-OMX deal. With a number of new brokerages and exchanges to service, vendors in the region are feeling upbeat about the possibilities.

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Source: Watersonline, By Lauren Hilgers, 01.09.2008