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BACK TO SCHOOL Summer is always too short but we hope you managed to spend some quality time with your family and are ready to pick up where we left off. We start with darkpools which has seen regional regulators scrutinize their value particularly with Barclayâ&#x20AC;&#x2122;s casting a shadow on these venues. Continued developments coming out of China these days, namely, the Shanghai - HK connect and China stock and index options expected to go live in October. We look to the Philippines where we see a growing interest and investment at the exchange. And speaking of exchanges we saw a few outages during first half of the year and write about inevitable outages that can occur from time-to-time. Thailand continues to develop its derivatives market allowing for local funds broader investment into these products. I am sure we will get you back up to speed with this our lucky 13 issue.
Stephen J. Edge Editor
Wild Wild Web Ltd. Suite 811 8/F New Trade Plaza No. 6 On Ping Street Shatin, NT Hong Kong
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CONTENTS
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PAGE 12
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SEPTEMBER 2014 VOLUME 2 ISSUE 4
06 08 12 16
IN THE ZONE
COVER STORY COVER STORY DERIVATIVES
Our round-up of industry news and developments across Asia.
APAC traders react to Barclays’ dark pool case - Buy-side traders are more wary but urge prudence and diligence over pulling the plug on dark pools.
PSE navigates difficult waters – The Philippines’ capital markets are gradually emerging from legacy red-tape to modern trading methodologies.
China puts options on the table - Chinese regulators are expected to introduce options trading by the end of the year.
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20 22 26
ASIA FUTURES BUY SIDE TRADING SGX bets fairness will drive revenues - Reforms RECAP See the latest derivatives volume rankings at Asia’s exchanges.
announced by Singapore’s regulator aims to bolster the exchange’s reputation as it struggles against falling equity volumes.
OPINION POLL What has been the impact of the HK SFC ET regulations enforced in January
EQUITIES
Asia Equity Trading Recap. The latest rankings of turnover, average trade sizes, spread and market impact costs on Asia’s exchanges.
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PAGE 44
ASIA’S FRAGMENTATION FOOTPRINT
Read the latest on alternative venue competition in Asia.
A look at volatility around Asia.
24 -REGULATION
28 31 34 40
PAGE 40
18 -VOLATILITY
O&A
Collateral Management in Asia: Eight questions clients are always asking
Thai OTC derivatives market set to open up to accredited investors
42 - POST TRADE
Flexibility needed on Hong Kong-Shanghai link post-trade - Post-trade connectivity and processing may hamper interest amongst traditional investors
44 - TECHNOLOGY
HFT race threatens stability for Asian exchanges - Pressure for performance may be driving exchanges to chase illusory volumes.
46 - BACK PAGES
Dates – Exchange holidays and important industry events Directory – A listing of Asia’s electronic trading industry participants
EQUITIES
J.P. Morgan looks at the challenge of tackling customer demand across a range of differently maturing environments.
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IN THE ZONE
ASIA MARKET STRUCTURE HIGHLIGHTS FOR JULY AND AUGUST IN THE ZONEâ&#x20AC;Ś AUSTRALIA Market regulator the Australian Securities and Investment Commission (ASIC) on 8 July released a report reviewing its fee and cost disclosure practices in the superannuation and managed investment industry. ASIC undertook the review to understand industry practices and identify any gaps that may lead to underreporting of fees and costs. It is seeking feedback on proposed revisions to the rules that require the mandatory trade reporting of over-the-counter (OTC) derivatives such as interest
rate swaps. ASIC repealed its real-time short-sale tagging rule on 28 July, but market participants will still be required to provide end-of-day reporting to a market operator. From 1 October 2014, the Australia Stock Exchange (ASX)will implement a new fee schedule for interest rate futures and provide volume discounts for OTC clearing, thus lowering fees and boosting growth incentives for clearing participants in those business lines. CHINA Night trading on the Dalian Commodity Exchange (DCE) launched on 4 July with RBD Palm Olein and Coke the products being traded. HuaAn Asset Management Co. Ltd. introduced the HuaAn Germany DAX 30 ETF to China on 14 July. It is the first ETF based on a European index available in China. DUBAI The Dubai Gold and Commodities Exchange (DGCX) re-listed its Indian Rupee Options contract on 18 July. The contract was temporarily suspended in 2013 to facilitate migration to a new trading infrastructure. The Dubai Commodities Clearing Corporation (DCCC) successfully completed its first physical delivery against the regionâ&#x20AC;&#x2122;s first plastics futures contract. HONG KONG The combined fund management business in Hong Kong grew 27% on year to reach a new record high of HK$16 trillion (US$2
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IN THE ZONE trillion) as of the end of 2013, according to the Securities and Futures Commission (SFC). Hong Kong Exchanges and Clearing Limited (HKEx) appointed Roger Lee to head its new Market Operations group, reporting to Romnesh Lamba, co-head of Global Markets. China Exchanges Services Company Limited (CESC) appointed Mao Zhirong, a director of CESC and Head of Mainland Development at HKEx, to replace Bryan Chan as chief executive of CESC and Sanly Ho, HKEx’s head of Derivatives Trading, to serve as a director of CESC with effect from 1 August. LME Clear, the new clearing house for the London Metal Exchange (LME) market, received settlement finality designation, effective 8 August. It reduces systemic risk for LME Clear Members, providing stronger protection against the adverse operation of European insolvency laws in the event of a counterparty default. JP Morgan Asset Management announced on 18 August the launch of JPMorgan China A-Share Opportunities Fund, the first SFC-authorised and actively managed Renminbi Qualified Foreign Institutional Investor (RQFII) equity fund launched by a global asset management company. INDIA On 28 July, the Securities and Exchange Board of India and securities market regulators of 27 European Union countries and the European Economic Authority signed a bilateral Memorandum of Understanding (MoU) regarding supervision of Alternative Investment Fund Managers (AIFMs).
JAPAN The Monetary Authority of Singapore (MAS) granted the Tokyo Commodity Exchange (TOCOM) ‘Recognised Market Operator’ (RMO) status, effective 1 July, which permits TOCOM to offer direct market access to Singapore-based market participants. From 22 July 2014, sub-yen tick sizes will be introduced for the 100 most liquid stocks with the largest market capitalisation on the Tokyo Stock Exchange (TOPIX 100) and those stock prices will contain decimals. From 1 August, the Tokyo Stock Exchange (TSE) began to initiate Legal Entity Identifier (LEI) allocation service. The TOCOM announced on 11 August that it had received regulatory approval for Alternative Delivery Procedure (ADP), a futures contract provision that allows counterparts to deliver the underlying commodity under terms or conditions that differ from Exchange standards. Japan Exchange Group (JPX) selected NASDAQ OMX Group and NTT DATA as developers for its next-generation derivatives trading system. Nomura Asset Management (NAM) entered into an alliance agreement with Bridge Capital Asset Management, an investment manager specialising in incubation funds investing in hedge funds. NAM will invest up to ¥3 billion (US$28 million)in an incubation fund managed by Bridge Capital and will in turn be granted an option to make an equity investment in Bridge Capital. KOREA The Korea Exchange (KRX) commenced a mandatory clearing service for qualified Korean Won denominated interest rate swaps (IRS) WWW.ASIAETRADING.COM
contracts between financial investment companies on 30 June. The financial information service provider Markit announced on 8 July that MarkitSERV, its electronic trade processing service for OTC derivatives, is now connected to the KRX. From 1 September, the KRX is expected to reshuffle its after-hour market and introduce volatility interruption (VI) as part of an effort to revitalise the Korean capital market. MALAYSIA Bursa Malaysia Berhad introduced ASEAN Post Trade services on a subscription basis to its Participating Organisations for outbound, non-Bursa Malaysia Securities trades executed on participating ASEAN stock exchanges that are currently on the ASEAN Trading Link. PHILIPPINES The Philippine Stock Exchange (PSE) and NASDAQ OMX have signed an agreement for NASDAQ OMX to deliver its trading technology, X-stream Trading, to PSE. The new system is expected to go live in mid-2015. Deutsche Börse Market Data + Services and the PSE signed a MoU regarding the licensing of current market data offerings, increasing distribution channels for realtime data and new product design and innovation. SINGAPORE The Singapore Exchange (SGX) announced on 8 July the launch of its liquidity hub at the Hong Kong Exchanges and Clearing Data Centre.
From 9 July, eligible corporates and individuals in the Sino-Singapore Tianjin Eco-city (SSTEC) may conduct cross-border renminbi transactions with financial institutions and corporates in Singapore. The SGX announced that its Liaison Office in India has commenced operations with Neena Prasad as its Chief Representative. The office will support capital raising by Indian companies in Singapore. The SGX will reduce the standard board lot size of securities listed on the SGX from 1,000 to 100 units from 19 January 2015. TAIWAN The Taiwan Stock Exchange (TWSE) launched its second generation Fully Automated Securities Trading system, replacing all existing trading platforms. The new proprietary system triples TWSE’s trading capacity, reduces latency by seventeen times and doubles system efficiency. THAILAND The Thailand Futures Exchange (TFEX) announced that its first-half derivatives trading volume increased 38% to 93,834 contracts per day from a year earlier, boosted by newly launched mini SET50 futures and stock futures. The TFEX removed silver futures from its trading board, effective from the night session of 31 July. To facilitate cross-border investment, the Thailand Securities and Exchanges Commission (SEC) is seeking public comment on revised draft regulations on services in investment products denominated in foreign currencies. September 2014
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COVER STORY 1
“Dark pools are easy political targets but they can be very efficient for institutional clients...”
Kent Rossiter Head of Regional Asia-Pacific Trading, Allianz Global Investors
ASIA-PAC TRADERS REACT TO BARCLAYS’ DARK POOL CASE Buy-side traders are more wary but urge prudence and diligence over pulling the plug on dark pools. Dan Barnes reports.
O
n 25 June 2014 the New York Attorney General, Eric Schneiderman filed a summons to Barclays, the UKheadquartered broker, alleging that it had misrepresented its dark pool activities to increase its market share. The allegations – which Barclays is contesting – specifically claim that the broker had misled its clients about the amount of predatory behaviour taking place in the dark pool. Dark pools are trading venues that disclose little or no pre-trade information, which in theory prevents large orders from being spotted. As a large order takes time to fill, any firm gaining insight into its size and price range can use that information to find buyers/sellers elsewhere trading at a another price and arbitrage the difference. Where that difference is taken in profit by the arbitrageur, it is a cost to the trader placing the block order, typically a long-only buy-side trader. By concealing that information, a dark pool can prevent arbitrageurs from spotting large orders.
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“Dark pools are easy political targets but they can be very efficient for institutional clients in cases where the trader wants to trade in size, within the spread, or at the mid-price,” says Kent Rossiter, head of Regional Asia-Pacific Trading for asset manager Allianz Global Investors. In Asia Pacific, dark trading is only conducted in a few markets, such as Japan, Hong Kong and Australia. As a consequence, the region does not have the same scale of trading in the dark that the US or European markets experience. Nevertheless the proportion can be significant. According to the Australian Securities Exchange on average around AU$1.05 billion (US$982 million) of daily turnover, or 21% of the AU$5.010 billion (US$4.67 billion) in average total turnover was executed in the dark between 11 and 15 August 2014, the latest data available at the time of going to press. An average of 5.6%, included in that 21%, was being traded on the exchange’s WWW.ASIAETRADING.COM
COVER STORY 1 own dark pool. The average daily turnover on ToSTneT, part of the Japan Exchange which dark pools are required to connect to, was ¥192 billion (US$1.8 billion) for the five working days up to 26 August, representing 9.3% of the ¥2.052 trillion (US$19.7 billion) in average daily equity turnover for that period. Hong Kong is said to trade around 3% of average daily volume via dark pools, according to market data provider Morningstar, which would be approximately HK$1.8 billion (US$232 million) of the exchange’s HK$63 billion (US$8 billion) daily turnover for the first seven months of 2014.
“We’ve always paid a lot of attention to dark pools and with the Hong Kong electronic trading rules and ASIC rules about trading at midpoint, for a lot of people this had been taken care of.”
Emma Quinn Head of Asia Pacific Trading, Alliance Bernstein
Comparatively, Bloomberg has reported data shows that off-exchange trading in the US, which equates to dark pool operations, broke the 40% barrier on 10 June 2014, its highest level since hitting the all-time peak of 41.7% on 22 June 2012.
Growing concern The scale of the business in the US has led to growing political pressure to investigate dark trading practices. Since the Barclays case was announced Credit Suisse, Deutsche Bank and UBS have also acknowledged they are speaking to authorities about their own dark pool operations in the US. The greatest disclosure was given by UBS which noted in its Q2 2014 Report, “UBS is responding to inquiries concerning the operation of UBS’s alternative trading system (ATS) (also referred to as a dark pool) and its securities order routing and execution practices from various authorities, including the Securities and Exchange Commission (SEC), the New York Attorney General and Financial Industry National Regulatory Authority (FINRA), who reportedly are pursuing similar investigations industry-wide.” The SEC investigation is said to have opened in 2012 but these investigations have been hurried along by the very public allegations made in Michael Lewis’s ‘Flash Boys’ book released on 31 March 2014. It detailed brokers’ exploitation of long-only buy-side client orders by allowing high-frequency trading (HFT) clients to interact with block orders. HFT firms use high speed data feeds and trading connections with trading engines that can make place orders in microseconds based upon available data. Although electronic trading engines and algorithms are used by the majority of institutional equity traders, when such firms invest long they are capturing alpha over a period of years. As a result they do not have a business case i.e. daily, low-risk profit, to source the equipment and low-latency telecom connections necessary to process data and trading decisions at such high speeds. Intraday volatility is managed by traders whose platforms seek to avoid any impact on price while sourcing liquidity effectively. Some HFT strategies, such as latency arbitrage, actively try to arbitrage large block trades and therefore add cost to the buyside. By feeding and processing data faster than other firms they are able to interact with the market more rapidly, effectively getting a look at the book that other traders cannot get. WWW.ASIAETRADING.COM
It is precisely these strategies that Schneiderman fears Barclays’ clients were exposed to. However these risks are not new to buyside traders or regulators.
Well prepared In 2012, when the SEC was reportedly starting its investigation, ASIC set up two task forces, one to investigate HFT and another to investigate dark pools in the Australian market. The task forces found that it was in fact dark pools, rather than high frequency trading which were its chief source of concern. In a March 2013 paper, the regulator reported that “some crossing systems allow, or have previously allowed access to their crossing systems by clients that the industry widely considers to be highfrequency traders while maintaining there is no high frequency trading in their crossing system.” In August 2013 a paper written by Will Psomodelis, head of trading Australia at investment management firm Schroders, and Stuart Baden Powell, then-executive director at brokers RBC Capital Markets detailed proprietary research by the two firms which indicated that in certain dark pools “there were persistent losses in certain venues more consistent with arbitrage.” As a result of its own findings, ASIC released a series of new regulations; the first issued in May 2013 required dark pools to deliver meaningful price improvement on trades while recategorising block trades as AU$200,000, AU$500,000 or AU$1 million depending on a stock’s liquidity. Further rules were put in place over a nine-month period from August 2013 to deliver better transparency and execution to the users of dark pools. As one Australian-based buy-side trader puts it; “ASIC have been on top of this for years.” In Hong Kong, a consultation on the regulation of alternative liquidity pools (ALPs) was concluded in April September 2014
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COVER STORY 1 2014 by the special administrative region’s market regulator, the Securities and Finance Commission (SFC). The main proposals were to introduce a harmonised set of rules across all market operators, where before firms were assigned a set of operating parameters along with their automated trading licence and to ban retail order flow from dark pools. These are added to a requirement that came into effect 1 January 2014 that any intermediary takes responsibility for the operation of electronic trading systems, which has required firms to revisit their use of order routing platforms and trading venues. As a consequence of these provisions, many vigilant buy-side traders feel that the risks in the US are not a threat to wary firms in Asia-Pac. Emma Quinn, head of Asia Pacific Trading at asset manager Alliance Bernstein says, “We’ve always paid a lot of attention to dark pools and with the Hong Kong electronic trading rules and Australian Securities Investment Commission (ASIC) rules about trading at midpoint, for a lot of people this had been taken care of.” However Japan, which has seen a significant level of market fragmentation across both proprietary trading systems, such as SBI Japannext and Chi-X Japan, and dark pools, has been less responsive than the other markets.
“
[Japan] FSA/ regulators may consider regulating dark pools in Japan but in the short-term, we see no action to be taken from regulators or the exchanges.”
Tetsuya Wakabayashi Head of trading, Invesco Asset Management
The Financial Services Agency, Japan’s regulator, published a report on dark pools in May 2013 authored by Yoko Shimizu, special research fellow, at the FSA’s Financial Research Center, however this only reported on US and European market regulatory approaches at the time. Tetsuya Wakabayashi, head of trading, Invesco Asset Management, Japan, says, “Revision of dark pool usage is not happening both on the FSA/Japan Exchange Group (JPX) side. FSA/regulators may consider regulating dark pools in Japan but in the short-term, we see no action to be taken from regulators or the exchanges.”
Well prepared Despite the varied efforts of market regulators to manage the risks created by broker dark pools, the alleged deliberate misleading of clients by Barclays has made many buy-side firms nervous. Schneiderman’s case notes report one former senior-level director within Barclays’ Equities Electronics Trading division, saying “Barclays was doing deals left and right with high frequency firms to invite them into the pool to be trading partners for the buy-side. So the pool is mainly made up of high-frequency firms… [T]he way the deal would work is [Barclays] would invite the high frequency firms in. They would trade with the buy-side. The buy-side would pay the commissions. The high-frequency firms would pay basically nothing. They would make their money off of manipulating the price. Barclays would make their money off the buyside. And the buy-side would totally be taken advantage of because they got stuck with the bad trade … this happened over and over again.” WWW.ASIAETRADING.COM
A Singapore-based head of trading at a regional asset manager, who spoke on condition of anonymity, said that using FIX tags can help, because they allow the dealer to track how trades are progressing in venues once they leave a dark pool, however the technology does not make orders visible while they are still in a pool. “The question has now been raised, how do I know that a broker is doing what they say they are doing?” he says. “There has been a lot more doubt cast on dark pools. We insist that brokers either fill out a very extensive survey which is signed off by compliance and distribution or we get third party verification that confirms the broker is doing what is says that it is doing.” Wakabayashi believes that a raised level of caution is reasonable as long as that leads to prudent and proportional action. “Here in Japan, after the incident in US, more clients do their due diligence, maybe even turning off the dark pool functionality or have put on more additional features like no HFT or proprietary crosses,” he says. “Clients also ask more questions about how a specific dark pool might work. The important thing to remember is how to use dark pools after understanding its characteristics. I believe that dark pools are beneficial venues and view the sellside as partners.” September 2014
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COVER STORY 2
PHILIPPINE STOCK EXCHANGE NAVIGATES DIFFICULT WATERS The Philippines’ capital markets are gradually emerging from legacy red-tape to support economic growth and modern trading methodologies. Dan Barnes reports.
In 2014 the Philippine Stock Exchange (PSE) has heralded the arrival of direct market access (DMA), stock lending and the acquisition of a new trading platform, yet trading is still impacted by the complex regulatory and legal framework. The PSE began a reform programme in 2013 at the crest of a wave of trading volume. In late 2013 / early 2014, volumes began to fall; Thomson Reuters’ data notes that monthly average turnover went from US$4.6 billion for the whole of 2013 to US$3.6 billion in the first seven months of 2014. The Philippines was hit by an enormous earthquake and a typhoon in late 2013, displacing 4.1 million people and together costing ₱424 billion (US$9.6 billion) in damages, estimated by the World Bank to be 3.7% of GDP, which inevitably carried into the capital markets. However Hans Sicat, president and CEO of the PSE believes that the rotation by institutional investors out of emerging market equities in early 2014 was the likely trigger for the drop in order flow, and that the tide has turned, allowing the market to revive in the second half of the year. “Over the last three to four months values are creeping back up and just getting into the zone that they were in last year,” he says. “The government figures have shown GDP growth of 6.4% for Q2 which will reinforce that the macro-fundamentals of the Philippines remain solid, despite some issues.”
“Where they [exchanges] vary is in the existence of futures and options, the ownership of the commodities market and the fixed income market.”
Robert Frojd Managing director, Nasdaq OMX
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Any change in quantitative easing (QE) in western economies and China’s economic performance are liable to affect appetite for emerging market securities for the foreseeable future; when Ben Bernanke, chairman of the Federal Reserve, mentioned ‘tapering’ of the US QE programme in 2013, issuance stopped on the exchange. “Nothing happened for three months – some people started to worry,” recalls Sicat. “Then there was flurry of new issuance toward WWW.ASIAETRADING.COM
COVER STORY 2 the end of the year which made up for it.” The PSE and Philippines’ market regulator, the Securities and Exchange Commission (SEC), are doing what they can under the ‘Capital Markets Development Plan (2013 – 2017)’ to deal with local factors that can affect trading volume, volatility and liquidity, whilst negotiating such tempestuous macro events. An important effect has been to increase local liquidity, which Sicat notes reduces the volatility associated with sudden outflows triggered by macros-economic pressures. Neil Mclean, head of Execution Trading Asia ex-Japan, at agency broker Instinet, says that the positive national outlook has seen the market open up. “As the rating agencies have improved the rating of the Philippines, it has allowed not only those with a very broad mandate but also funds with a more restricted mandate to invest,” he says. “Index funds continue to be very active. Exchange traded fund (ETF) influence has been pretty dramatic in the last couple of years and emerging market interest, particularly in a low interest rate environment, has become more palatable. So it is not just hedge funds we see trading.”
STATE OF PLAY
There are nuances to trading in the Philippines that overseas dealers particularly must be aware of. Liquidity is focused in the larger names, as in most markets, but also the amount of stock available is restricted by a relatively low level of available free float. Issuers must have minimum free float of 10% to maintain their listed status, and that proportion of publicly tradable stock is typical of younger, smaller firms. More established businesses, including those that are components of indices, will more often have a free float of 20-30%, according to the PSE. Keith Roy, head of trading at broker Maybank ATR, says that liquidity can be significantly affected by investment trends. “The market has been more liquid over the past year and as with
“We seem to be more regulated than some of our ASEAN counterparts and the SEC is working towards a mutual recognition framework with the other ASEAN regulators...”
Hans Sicat CEO, Philippine Stock Exchange any market the index names are more liquid than others,” he says. “It really depends, if a stock is flavour of the year it can suddenly increase in liquidity then towards the end of the year it might die down again.” Foreign ownership restrictions (FORs) limit reduce the potential supply of liquidity. FORs applying to local banks were lifted on 15 July 2014 by the country’s president, Benigno Aquino. This raised the ownership limit of local banks by “established, reputable and financially-sound” foreign banks from 60% to 100%. Other ownership restrictions still exist; many were enshrined in the Constitution of 1987, with a 60% local ownership requirement for corporations operating in the natural resources, public utilities, and non-sectarian educational institutions spaces while advertising is even higher with a requirement for firms to be 70% owned by Filipinos. The president is able to impose further restrictions biannually and the World Bank reports that since 2000, “only large retailers and casinos have experienced reductions in FORs.” Frictional trading costs can be 77 basis points on each side of a trade according to SEC research from 2013 (see box 1), of which 50 bps is transaction tax. In the Filipino Congress, a Tax Technical Working Group is expected to propose the passage of a ‘The Financial Sector Tax Neutrality Act’, which would include a
TOTAL FRICTION COST ON SECONDARY TRADING OF EQUITY SECURITIES PER JURISDICTION EXCHANGE
STAMP DUTY*
TRANSACTION TAX**
COMMISSION
CLEARING FEE*
TRADING FEE*
TOTAL PER SIDE (in bps)
TOTAL PER SIDE EX COMM (in bps)
BMB
10 bps
None
Fully negotiable 3 bps
70 bps
83.00
83.00
HOSE
None
10 bps
Max of 45 bps No data
No data
55.00
10.00
HKEx
10 bps
0.3 bps
Fully negotiable None
0.5 bps
10.80
10.80
IDX
None
1.8 bps
Max of 130 bps 0.9 bps
3 bps
135.70
5.70
KRX
None
30 bps
Fully negotiable 0.04446 bps
0.22763 bp
30.27
30.27
NSE
None
10 bps
Max of 250 bps US$0.033
Rs. 3.00-3.25/lakh
260.33
10.33
PSE
None
50 bps
25 bps to 150 bps 1 bps
1 bps
77.00
52.00
SSE
10 bps of the
None
No data
No data
No data
10.00
10.00
Max of 30 bps No data
No data
136.96
106.96
traded value SZSE
“100 bps for seller” 6.96 bps --> 100bps**
SGX
None
None
Fully negotiable 4 bps
0.75 bps
4.75
4.75
SET
None
None
20 or 25 bps
0.1 bps
0.5 bps
20.6
0.60
TWSE
None
30 bps
Max 14.25 bps
No data
0.65 bps
44.9
30.65
*For both buyer and seller unless stated otherwise. **For seller only unless stated otherwise.
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the global forum for derivatives markets 23-25 september 2014
I
intercontinental hotel
I
geneva, switzerland
FIA and FIA Europe join the Swiss Futures and Options Association in co-hosting B端rgenstock 2014: The Global Forum for Derivatives Markets in Geneva. Register online and keep track of programming, events and speakers at www.burgenstock.org.
COVER STORY 2 provision for the abolition of a tax on initial public offerings, and the lowering of the transaction tax for stocks to .25 basis points of the gross value in money of the shares, however a date for this proposal has not been set.
FRUITS OF CHANGE
The demographic of trading firms has changed as local investors have seen greater access to investment products, but there is still a strong overseas presence, observes McLean. “The top five foreign brokers account for about 50% of the volume, the next five take about 20%,” he says. “I expect it to continue to be top centric because the market is almost driving itself now. Local money managers have had a lot of success in launching unit trusts, index trackers and managed money accounts, so where three years ago the market might have been 80/20 foreign to local trading now locals might make up to 40% on the day in the Philippines.” Historically, operational reforms by the PSE have borne fruit. The exchange first modernised its trading platform in 2009 using a system acquired from NYSE Technologies, and volumes have more than doubled since then. A change to the Nasdaq platform in 2014 offers further opportunities. Leo Katigbak, head of Institutional Equities, at broker Mandarin Securities, says, “The PSE has always been very helpful with helping members, volume has mushroomed over the last five years since the last upgrade exchange. That is also expected with the new system.” The X-stream Trading platform that the PSE acquired from Nasdaq OMX is expected to go live in mid-2015 and is already in use by Bursa Malaysia and the Philippines bond market P-DEX, with whom the PSE is engaged in takeover talks. Robert Frojd, managing director at Nasdaq OMX for South Asia, South-east Asia & Pacific says, “There are not particular challenges that exist across all emerging market exchanges, but they typically need flexibility in order to deliver a strategy for growth and the ability of management to formalise that strategy realistically. All markets have equities with various degrees of institutional investors and brokers, with more or less active retail trading. Where they vary is in the existence of futures and options, the ownership of the commodities market and the fixed income market. The PSE has a clear roadmap of where it wants to be in three to five years’ time.” Having tooled up for the operational side, the exchange will need to deal with the rules that constrain its ambition. While exchange-traded funds have been launched in the Philippines directly, index futures had to be launched by the PSE on the Singapore Exchange in November 2013, in order to get around local regulatory constraints. However for plain vanilla products, the improvements in technology will help to tackle capacity and reliability issues.
SEEING THE POTENTIAL
Currently buy-side traders use a mix of high- and low-touch services with brokers, depending upon investor sophistication and market liquidity. Roy says, “We take orders via voice and email but more often than not they will be placed via a FIX-based order management system (OMS) with instructions to limit market impact for illiquid names.” The success of domestic market growth, and the expectations for future growth, has given Instinet confidence in the potential growth of electronic trading and it launched its algorithmic trading suite ‘Execution Experts’ and a DMA service in the Philippines on 8 May 2014. “We can see that the liquidity has really grown, while domestics have really expanded market share and turnover in general has increased,” says McLean. “That means there is more interest from everybody in using smart trading tools to access the market, the algos and the platforms.” There are a raft of further changes ahead, which will open the door wider for increasingly automated and sophisticated trading strategies. Direct market access (DMA) rules were issued by the Securities and Exchanges Commission on 29 October 2013, although local traders say that the PSE’s own service is reported to be limited at present. A securities lending framework is also expected to go live by the end of 2014, which Sicat says will increase volumes by at least 5%, but with expectations into the double digits, and further the development of a derivatives market. Katigbak says, “Everyone is waiting to see how the short-selling regulations impact. There is access to that type of activity offshore where people are trading swaps but domestically that is very limited.” Even with the approval for stock lending to occur, the complex web of regulations and authorities had to be negotiated to in order provide liquidity into the stock lending business, explains Sicat. “About a month ago we got approval from the Insurance Commission to allow insurance companies that hold equities to borrow and lend them which will increase accessibility of stocks to portfolio managers and broker dealers,” he says. “However there will not be an instantaneous change, [traders] will have to practice the process so they can get comfortable with it.”
McClean says, “My big expectation with the new system is that we will see increased stability in volume.”
Another potentially significant boost is connectivity with the ASEAN Link, the cross-border trading system that is currently connecting Malaysia, Singapore and Thailand’s exchanges, but is also expected to encompass Indonesia and Philippines in the future. The merger with PDEX would provide the PSE with ownership of the national depositary and settlement infrastructure, crucial to providing a full service pipe to the link, but there are also legacy regulations which prevent Filipino investors from buying securities not registered with the SEC that need to be overcome.
Katigbak adds, “The big overhang has been the capacity issue. People don’t know how the market will react if they throw high volumes in but the new system is resilient and that should be an eye-opener for most people.”
“We seem to be more regulated than some of our ASEAN counterparts and the SEC is working towards a mutual recognition framework with the other ASEAN regulators, which will be the necessary condition of the trading link,” says Sicat.
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DERIV STORY
T
he Chinese authorities have long held a tight grip on the country’s capital markets, restricting the availability of financial instruments and managing the limited participation of foreign investors through a quota system. Equities and futures are traded on the Shanghai and Shenzhen exchanges, but the only equity derivatives in use are equity index futures introduced in 2008. Commodity derivatives, meanwhile, have been dominant. The World Federation of Exchanges estimates two-thirds of all commodity futures traded globally are on Chinese exchanges. Yet as China pushes forward with financial liberalisation, regulators are keen to expand investors’ capacity to hedge risk. With that in mind, all four futures exchanges – the Zhengzhou Commodity Exchange (ZCE), Dalian Commodity Exchange (DCE), Shanghai Futures Exchange (SHFE) and China Financial Futures Exchange (CFFE) – as well as the Shanghai Stock Exchange have announced launch plans for options trading that will comprise equity indexes, single stocks and ETFs as well as commodities futures. “As China’s capital markets become more modern and sophisticated, investors want more ability to customise risk profiles,” says Dave Mullaney, an associate and China specialist at the Rocky Mountain Institute in Colorado, an NGO focused on sustainability, and a former trader at Deutsche Bank in Hong Kong and UBS in the US. “They will naturally look for tools like options.”
for managing investments and are attractive to both retail and institutional investors.” “Options allow you to make single direction bets with limited downside risk if you are a buyer. That is potentially a very valuable tool in a portfolio,” says Mullaney.
MARKET MECHANICS
Options contracts are currently tested in China in mock trading environments. CFFEX also launched a market-making competition in the mock trading environment for CSI 300 Index options. While Chinese regulators have not provided a confirmed timetable for the launch of options trading, market insiders expect exchange-traded fund (ETF) options referencing the CSI 300 and SSE 50 to be launched ahead of equity indexes and single stocks. ETFs will serve as the pilot products for the China options market, as from Beijing’s viewpoint, it is more difficult to manipulate them. “It is pretty clear ETFs will be first,” says Ronalds. “As composite securities they should be less volatile than stocks.”
REGULATORY HURDLES
There are a number of regulatory challenges China’s new options market will face. For instance, China’s current regulatory framework in China prohibits several options trading strategies,
CHINA PUTS OPTIONS ON THE TABLE
Chinese regulators are expected to introduce options trading by the end of the year, Matthew Fulco reports Once options are introduced to China, it will further signify the Chinese investment community and regulators’ commitment to market development, says Nick Ronalds, managing director and head of equities at the lobby group the Asia Securities Industry & Financial Markets Association in Hong Kong. Ronalds believes options offer significant opportunity for both the buy- and sell-side. “For the sell--side, China is a large, but relatively undeveloped market,” he says. “There is huge opportunity there. For the buy-side, options are a whole new tool
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particularly those pertaining to market makers. One example is the 500 cancellation rule, which means market participants can only cancel 500 times per contract per day. Regulators may have some flexibility on that rule though, says Vivian Deng, China chief representative at derivatives agency broker, Newedge, in Shanghai. “We expect that the introduction of options contracts could lead to exchange-designated market makers being excluded from WWW.ASIAETRADING.COM
DERIV STORY the 500 order cancellation rule,” she says.
unfamiliar.
High margin requirements for market makers are another obstacle that must be overcome. Analysts say those rates are not always reasonable. For instance, the current margin system on the CFFEX requires 10-15% of capital to be charged as margin. When margin rates are too high, they may stymie capital efficiency.
“Options have a very different risk profile than stocks,” he says. “Customers need to understand how these instruments work. Intermediaries must have appropriate risk systems to monitor the exposure of their clients.”
“The Chinese futures market is pre-margin and gross-margin based. If applied to options market making, this would be very capital intensive,” says Deng. For its part, CFFEX is reportedly developing a new margin strategy based on standard portfolio analysis of risk (Span) that can reduce margin rates 30-40%. In Asia, the Hong Kong, Osaka, Taiwan Futures, Singapore and Bombay Exchanges all use the Span approach. Meanwhile, in the Chinese market, the existing T+1 settlement rules applying to physical stock transactions – T+0 settlement applies to derivative products such as futures – are problematic for market makers. T+1 forbids the sale of stocks bought on the same day, making it difficult to hedge options with physical stocks.
Mullaney of the Rocky Mountain Institute says the sell-side must be well prepared to deal in the new products. “One of the main risks that accompanies options is the chance unqualified people are selling them,” he says. “You are highly leveraged and hedging an option book is quite a technical task.” Fortunately, Chinese regulators are taking steps to educate financial professionals and investors about the options market. The US-based Options Industry Council and the Shanghai Stock Exchange together offer a program in China based on OIC’s content, intended to boost the development and responsible use of financial products. Meanwhile, despite regulatory challenges and uncertainty about the exact launch date, market makers are eagerly awaiting the opportunity to begin options trading in China, says Deng of Newedge.
But some analysts say regulators should maintain the T+1 settlement rules to prevent investors from trading excessively. Since individual investors dominate the Chinese market, if they trade too frequently that could end up harming retail investors, they say.
“We expect that the introduction of options contracts could lead to exchange-designated market makers being excluded from the 500 order cancellation rule,”
Vivian Deng China chief representative, Newedge
As such, market makers who would like to see a change in the settlement rules so that they can hedge options positions more easily should not get their hopes up, market insiders say.
PREPARING FOR THE LAUNCH
Ronalds of the Asia Securities Industry & Financial Markets Association believes that as China prepares to launch its options market, it is imperative that bankers and salespeople educate investors about the products, by and large with which they are WWW.ASIAETRADING.COM
“We see great interest from global market makers in participating in the China options market. Some of them have already onshore operations, others are preparing to enter,” she says. September 2014
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VOLATILTY
S&P/ASX Volatility Index 20 40 40 3518
35
3016
30 14 25
Last
2012
25
200DMA
1510
20
10 8 9/11/2013 3-Sep-13
12/11/2013 3-Dec-13
15 May-13
3/11/2014 3-Mar-14 Last Nov-13 Last
Aug-13
6/11/2014 3-Jun-14
200DMA 200DMA Feb-14
May-14
CBOE China ETF Volatility Index (“VXFXI”) 33 40 31 35 29 27 30 25 25 23 21 20 19 15 17 15 10 9/11/2013 3-Sep-13
12/11/2013 3-Dec-13
3/11/2014 3-Mar-14 Last Last
6/11/2014 3-Jun-14
200DMA 200DMA
Hang Seng Indexes- Volatility Index 24 40
22
35 20 30 18 25 16 20 14 15 12 10 10 3-Sep-13 Aug 26 2013
Nov 73-Dec-13 2013
Jan 28 20143-Mar-14 Last Last
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Apr 10 2014
3-Jun-14 Jun 27 2014
200DMA 200DMA WWW.ASIAETRADING.COM
VOLATILTY
India NSE Volatility Index 40 35 30 25 20 15 10 3-Sep-13
3-Dec-13
3-Mar-14 Last
3-Jun-14
200DMA
Volatility Index Japan (VXJ) Volatility Index Japan (VXJ)
40 35 37 30 32 25 27 20 22 15 17 12 10 20130801 3-Sep-13
20131015 3-Dec-13
20131226
3-Mar-14
Last Last
20140314
20140529 3-Jun-14
200DMA 200DMA
KOSPI 200 Volatility Index 19 18 4017 3516 3015 14 25 13 20 12 1511 1010 2013/08/30 3-Sep-13
2013/11/15 3-Dec-13
2014/01/29 3-Mar-14 Last Last
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2014/06/27 3-Jun-14
200DMA 200DMA September 2014
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DERIVATIVES
Source: Exchange Websites
TOP 50 Futures Contracts By Volume in Asia for Jul - Aug 2014 Exchange
Product
Vol. August 2014 Vol July 2014
Shanghai Futures Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange National Stock Exchange of India Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange Shanghai Futures Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Shanghai Futures Exchange Shanghai Futures Exchange Dalian Commodity Exchange MCX-SX Dalian Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Korea Exchange Australian Securities Exchange Shanghai Futures Exchange Shanghai Futures Exchange Dalian Commodity Exchange Australian Securities Exchange Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Australian Securities Exchange Multi Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Bursa Malaysia Dubai Gold & Commodities Exchange Osaka Securities Exchange Tokyo Commodity Exchange Tokyo Financial Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange National Commodity & Derivatives Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Tokyo Financial Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange
Steel Rebar Rapeseed Meal Soy Meal US Dollar/Indian Rupee Pure Terephthalic Acid (PTA) Flat Glass Zinc Futures Iron Ore Silver White Sugar Palm Oil Hard Coking Coal Coke Rubber Copper Linear Low Density Polyethylene US Dollar/ Indian Rupee Soy Oil No. 1 Soybeans Cotton No. 1 US Dollar 3 Year Treasury Bond Aluminum Gold Corn 90 Day Bank Bills Methanol Rapeseed Oil 10 Year Bond Crude Oil Thermal Coal Fibre Board Silver Micro Natural Gas Crude Plam Oil US Dollar/ Indian Rupee 10 Year JGB Gold US Dollar/ Japanese Yen Silver Mini Copper Nickel Ref Soya Oil Zinc Mini Nickel Mini Copper Mini Australian Dollar/ Japanese Yen Silver Aluminum Mini Gold Mini
51,644,066 49,542,596 35,061,520 29,618,885 21,003,610 17,759,970 14,865,658 14,491,582 14,239,300 11,915,664 11,729,806 10,411,426 9,805,704 9,710,090 9,159,808 9,117,382 9,105,416 8,994,166 6,172,026 6,025,570 3,790,547 3,405,781 3,318,508 2,815,366 2,787,858 2,085,846 1,914,118 1,681,450 1,671,581 1,325,059 1,154,434 1,148,612 1,104,603 922,884 880,943 763,748 624,851 577,285 576,616 568,835 498,491 463,761 413,125 403,339 376,013 365,620 326,956 325,131 324,957 315,639
56,369,458 72,347,232 35,768,312 21,810,903 30,889,156 18,079,760 15,799,130 19,223,926 21,700,924 12,059,604 12,885,480 9,503,038 12,074,772 14,215,556 12,285,992 14,193,224 11,530,743 8,425,134 2,889,426 2,840,844 3,694,807 3,747,883 4,048,274 3,181,238 2,019,074 2,452,211 2,040,396 1,890,136 1,572,258 1,406,514 580,434 1,799,256 1,361,705 861,814 811,761 798,322 599,348 606,190 464,296 684,100 553,306 677,653 407,915 524,457 522,665 408,703 336,899 398,779 389,654 405,323
(4,725,392) (22,804,636) (706,792) 7,807,982 (9,885,546) (319,790) (933,472) (4,732,344) (7,461,624) (143,940) (1,155,674) 908,388 (2,269,068) (4,505,466) (3,126,184) (5,075,842) (2,425,327) 569,032 3,282,600 3,184,726 95,740 (342,102) (729,766) (365,872) 768,784 (366,365) (126,278) (208,686) 99,323 (81,455) 574,000 (650,644) (257,102) 61,070 69,182 (34,574) 25,503 (28,905) 112,320 (115,265) (54,815) (213,892) 5,210 (121,118) (146,652) (43,083) (9,943) (73,648) (64,697) (89,684)
387,306,202
447,215,482
(59,909,280)
Total 20
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Difference
Type Metal Agriculture Agriculture Currency Commodity Commodity Metal Commodity Metal Commodity Agriculture Commodity Commodity Commodity Metal Commodity Currency Agriculture Agriculture Commodity Currency Interest Rate Metal Metal Agriculture Interest Rate Commodity Agriculture Interest Rate Energy Commodity Commodity Metal Energy Agriculture Currency Interest Rate Metal Currency Metal Metal Metal Agriculture Metal Metal Metal Currency Metal Metal Metal
WWW.ASIAETRADING.COM
DERIVATIVES
Top 20 Stock Index Futures for Jul - Aug 2014 Exchange
Index
Vol. August 2014
Vol. July 2014
China Financial Futures Exchange Osaka Securities Exchange National Stock Exchange India Singapore Exchange Korea Exchange TAIFEX Singapore Exchange Hong Kong Exchanges Osaka Securities Exchange Singapore Exchange Singapore Exchange Hong Kong Exchanges Thailand Futures Exchange TAIFEX Osaka Securities Exchange Australian Exchange Hong Kong Exchanges Osaka Securities Exchange Hong Kong Exchanges Bursa Malaysia
CSI300 Nikkei 225 mini S&P Nifty FTSE China A50 KOSPI 200 TAIEX Nikkei 225 HHI Nikkei 225 SGX CNX Nifty MSCI Taiwan HSI SET 50 TAIEX mini TOPIX SPI 200 MSI TOPIX mini MHI KLCI
16,861,139 14,299,704 4,749,272 3,714,367 3,042,121 2,107,530 1,740,622 1,606,127 1,552,163 1,460,441 1,496,737 1,430,956 1,210,867 1,058,444 1,018,765 640,463 538,368 361,915 251,255 169,709
14,846,667 12,593,279 6,637,670 3,155,895 3,012,551 2,526,141 1,491,940 1,605,962 1,414,123 1,649,153 1,585,861 1,353,839 1,260,106 1,239,156 950,484 650,627 542,242 319,270 225,648 150,138
2,014,472 1,706,425 (1,888,398) 558,472 29,570 (418,611) 248,682 165 138,040 (188,712) (89,124) 77,117 (49,239) (180,712) 68,281 (10,164) (3,874) 42,645 25,607 19,571
Total Region
59,310,965
57,210,752
2,100,213
Top 5 Gainers
Top 5 Decliners
Exchange
Product
National Stock Exchange of India Dalian Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange
US Dollar/Indian Rupee No. 1 Soybeans Cotton No. 1 Hard Coking Coal Corn
Net 7,807,982 3,282,600 3,184,726 908,388 768,784
Top 5 Agriculture Futures Exchange
Product
Zhengzhou Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange
Rapeseed Meal Soy Meal Palm Oil Soy Oil No. 1 Soybeans
Total
Net
Exchange
Product
Net
Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange Dalian Commodity Exchange
Rapeseed Meal Pure Terephthalic Acid (PTA) Silver Linear Low Density Polyethylene Iron Ore
(22,804,636) (9,885,546) (7,461,624) (5,075,842) (4,732,344)
Top 5 Commodity Futures Volume 49,542,596 35,061,520 11,729,806 8,994,166 6,172,026
111,500,114
Top 5 Currency Futures
Exchange
Product
Volume
Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange
Pure Terephthalic Acid (PTA) Flat Glass Iron Ore White Sugar Hard Coking Coal
Total
21,003,610 17,759,970 14,491,582 11,915,664 10,411,426
75,582,252
Top 5 Metal Futures
Exchange
Product
Volume
Exchange
Product
Volume
National Stock Exchange of India MCX-SX Korea Exchange Dubai Gold & Commodities Exchange Tokyo Financial Exchange
US Dollar/Indian Rupee US Dollar/ Indian Rupee US Dollar US Dollar/ Indian Rupee US Dollar/ Japanese Yen
29,618,885 9,105,416 3,790,547 763,748 576,616
Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange
Steel Rebar Zinc Futures Silver Copper Aluminum
51,644,066 14,865,658 14,239,300 9,159,808 3,318,508
43,855,212
Total
Total WWW.ASIAETRADING.COM
93,227,340 September 2014
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BUYSIDE
SGX BETS FAIRNESS WILL DRIVE I REVENUES
“Clearly, the Singapore Exchange (SGX) has weighed in with a preference for strong corporate governance and transparency, even at the expense of losing potential listings,”
Kenneth Ng CIMB Investment Bank
n the latest full-year earnings release for Singapore Exchange (SGX), dated to fiscal year ended 30 June 2014, the exchange saw a 4% decline in revenue to S$686.9 million. The drop was driven by a 17.5% decrease in the company’s securities revenue to S$226.9 million as the daily average traded value of securities had fallen. Over that period SGX’s equities trading equated to 0.99% of Asia Pacific’s total volume.
Recent reforms announced by Singapore’s market regulators aim to bolster the exchange’s reputation for governance to attract listings, as it struggles against falling equity trading volumes. By Rupert Walker.
Superficially, tighter restrictions and closer supervision might put off issuers and traders who can enjoy the more buccaneering freedoms of other exchanges with a stronger culture of caveat emptor. SGX is betting on increasing opportunities and hence raising revenues by inducing a culture of fairness. However it has seen a decline in both actual turnover, falling to US$16.9 billion average monthly volume in 2014 from US$20.6 billion average monthly volume in 2012, and in proportional volume falling to 0.99% of Asia-Pacific volume from 1.64% in 2012. “It is often hard to know at what point regulations should be relaxed in order to attract listings, without threatening the integrity of a stock exchange. Clearly, the Singapore Exchange (SGX) has weighed in with a preference for strong corporate governance and transparency, even at the expense of losing potential listings,” says Kenneth Ng, head of Singapore research at CIMB Investment Bank. Many stock market regulators throughout Asia Pacific have revised trading and listing rules during the past few years. Sometimes their initiatives have been motivated by competitive necessity against rival regional exchanges or, especially, the threats to local hegemony from alternative platforms. In other cases, they have been provoked by an egregious incident. The Australian Securities and Investment Commission and
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BUYSIDE the Japanese regulators are widely applauded by market practitioners for introducing sober, measured rules and refinements. Conversely, many traders and brokers complain about the Hong Kong’s Securities and Futures Commission responding disproportionately to immediate events and set rules that are erratically applied. “A major challenge for exchange participants is the tendency for regulators to knee-jerk react to highly publicised incidents or popular – and often ill-informed – outrage at apparent market failures without proper examination and circumspection. The result can be misguided and confusing new rules that frustrate investors, traders and brokers,” claims a Singapore-based exchange consultant. Although the authorities in Singapore can be accused of reactive behaviour, arguably the new rules they introduce are usually proportionate and in line with a consistent strategy. Ng reckons that the Monetary Authority of Singapore (MAS) and SGX response on 1 August to the joint consultation paper on the Review of the Securities Market Structure and Practices, published six months earlier, demonstrates that commitment. The authorities had been reviewing securities-market rules since October, when three small-cap stocks plunged and lost billions of dollars in market value, brought down other small-company shares prompted angry investors to criticize what they saw as an inadequate regulatory regime. In March, SGX issued “trade with caution” warnings on shares displaying unusual trading activity and required companies to notify SGX of takeover talks and maintain a list of people who have knowledge of these deals.
August reforms The major August reforms are more substantive, and are designed to curb speculative trading, reduce credit risks for brokers, and mitigate dangers associated with low-priced stocks. SGX will introduce a minimum trading price of S$0.20 for stocks listed on the mainboard over the next 12 months to address risks of low-priced securities being more susceptible to excessive speculation. The regulator estimates that about 230 stocks may be affected by the minimum trading price requirement. “The aim is to prevent manipulation and protect retail investors,”says Ng. A separate decision to reduce the board lot size for securities listed on SGX from the existing 1,000 shares to 100 shares in January 2015 “should also be viewed as a similar but obverse initiative to help retail investors, because it will make attractive blue chips with high dollar prices more accessible”. The lot size increases the accessibility of highly-priced shares like those of DBS Group and Jardine Cycle & Carriage, and the reduction also applies to the Straits Times index-tracking SPDR STI ETF. An additional measure to curb speculation is a requirement to disclose short positions that exceed the lower of 0.05% or S$1 million of issued shares. The objective is to further enhance transparency of short selling activities in the securities market,” WWW.ASIAETRADING.COM
said the MAS and SGX statement on 1 August. “The new reporting threshold for shorting is partly a reaction to the specialist short funds that moved against Olam last year. Again, it is designed to curb speculation by these types of funds – and after all, it is consistent with reporting requirements for purchases by directors of a company’s stock when they are in effect declaring their interest,”says Ng. Meanwhile, in order “to help mitigate the risk of excessive leverage” and “to promote financial prudence”, according to SGX, investors will need to stump up a minimum 5% of collateral for transactions. The requirement is also meant to lessen the reliance on brokers to manage the credit risk of their clients – and is consistent with trends in alternative markets. “The collateral requirement reflects the reduced role in securities transactions of broker intermediaries, one of whose functions is to assume counter-party risk. As lit exchanges are forced to compete with dark pool platforms and online exchanges - which normally insist on collateral - rather than among themselves, so the middle-man becomes increasingly obsolete,” says Ng. Indeed, it also tacitly recognises what the Singapore-based consultant believes is the most significant trend in the region, namely “the fragmentation of domestic market activity away from local exchanges”. Overseas platforms are being established that trade their shares outside their jurisdictions – which makes sense with technology so sophisticated - and there is little reason for the trading of financial instruments to be confined to designated locations or time zones.
Tougher supervision The Securities Association of Singapore (SAS) will take the lead to address concerns of information asymmetry in the market, provide guidance on publication of trading restrictions and their rationale, and to promote consistent practice among SAS members. SGX will also set up three independent committees: Listings Advisory Committee, Listings Disciplinary Committee and Listings Appeals Committee to introduce a wider range of sanctions for breaches of listing rules. “These will further strengthen SGX’s listings process, improve transparency of its disciplinary process and enhance its ability to enforce the listing rules,” says the SGX. Certainly, the exchange needs a boost. It seems to be counting on enhancing its reputation good governance to attract both listings and investors, which will in turn generate secondary market revenues. Market liquidity is determined by the quality of listings and the transparency of secondary market trading, while manipulative activity is detrimental to both, argues Ng. The two are closely related. Stock valuations should fall which would make the commercial logic of listing in Singapore more compelling. “SGX can attract primary listings and investors if it continues to nurture an environment of fairness and rigorous corporate governance,” he says. September 2014
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REGULATION
THAI OTC DERIVATIVES MARKET SET TO OPEN UP TO ACCREDITED INVESTORS
I Vorapol Socatiyanurak
n response to the Bank of Thailand’s plan to further relax barriers around capital flows into Thailand, the Securities and Exchange Commission in the country has announced that it will allow mutual funds that cater to accredited investors to invest in derivatives without investment limits. The announcement is the latest in the BoT and SEC’s roadmap to develop Thailand’s capital markets.
Thailand SEC Secretary-General Presently, derivatives investments for mutual funds are restricted hedging transactions up to 100% of the notional value of the underlying. The new ruling will allow mutual funds catering to accredited investors to invest in derivatives over 100% of the underlying notional for generating higher return. Accredited investors comprise institutional investors, including commercial banks as well as high net worth individual investors (with total assets of over 50 million baht).
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REGULATION “The effect on liquidity may not be immediate as institutional investors can enter the market through OTC as well as through the offshore exchanges,”
Kawin Sangvichien deputy managing director, Siam Commercial Securities Further, and more significantly, mutual funds – and indirectly accredited investors – will be allowed into the small and tightly regulated OTC derivatives market in Thailand, which is currently only restricted to certain financial institutions and comprises primarily of foreign exchange and interest rate derivatives, according to data by the Bank of Thailand. According to Nopadon Nimmanpipak, assistant managing director and head of equities and derivatives trading at Phatra Securities in Bangkok, the new ruling sets the ball rolling on a reform of derivatives rules that will open up the OTC derivatives market and set the stage in the future for a local central counterparty to be established in the country. “We still have to clear the rules at the SEC and the Stock Exchange of Thailand (SET) and establish the tax implication for investment in these kinds of products. The industry will need to develop a platform for issuers to be able to effectively offer these products to investors much before we get into the system or platform for clearing them. The SEC is working, in parallel, towards the same goal and the same clearing structure as required by international regulations,” he says. Thailand is not directly a part of the G20, represented instead through the ASEAN which has occasionally served as a guest of the summit, and is therefore not bound to OTC reform as envisioned by the G20 in 2009 which required OTC transactions be cleared by a central counterparty and traded on an electronic platform. The SET’s cash equity clearing platform announced its compliance with the Principles of Financial Market Infrastructures (PFMI) by the Committee on Payment and Settlement Systems (CPSS), which forms the basis for OTC clearing counterparty regulation globally. The Thai SEC did not confirm, by press time, if it plans to set up a CCP for the domestic OTC market. In a research report published in March last year by the International Swaps Dealers Association (ISDA) and consultancy Celent, a Malaysian financial firm is quoted as expecting a SoutheastAsian centric CCP serving the OTC markets of Malaysia, Thailand and Indonesia: “The location of that can also produce a lot of nationalistic issues.” On the exchange front, an increase in mutual fund investment in derivatives should coincide with the SET’s plan to launch a 2 billion baht derivatives trading platform this year in a bid to become a regional financial hub in three years. Beginning in 2011, the SET’s strategy included joining the ASEAN link, which has already been achieved. Figures by the Thailand Futures Exchange (TFEX) suggest that almost 57% of derivatives trading on the exchange came from local high net worth individual investors in July 2014, versus 48% by institutional investors. According to the exchange, the SEC’s ruling will increase demand for exchange-trade derivatives products by institutional investors. WWW.ASIAETRADING.COM
The increasing demand from AI funds should add a greater portion of investments by institutions and also enhance the mechanism of price discovery on TFEX products,” the spokesperson adds. However, the immediate impact on liquidity in exchangetraded derivatives may not come through, according to Kawin Sangvichien, deputy managing director at Siam Commercial Securities in Bangkok. “The effect on liquidity may not be immediate as institutional investors can enter the market through OTC as well as through the offshore exchanges,” he says. The accredited investor scheme was launched in April 2013 in order to provide fund-raising enterprises some flexibility by defining a separate class of investors that would not need to comply with the reporting and disclosure requirements and do not need the same protections by the SEC as retail investors. Initially, accredited investors were allowed to invest, without limit, into unrated bonds and non-retail mutual funds that invest in these bonds and other non-investment grade debt instruments. According to the SEC, this move expands the range of options for some investors in Thailand. Although these investors can already invest directly to exchange-listed derivatives, this move will open up access to the OTC market for derivatives in Thailand. Asset management companies are required to put in place a robust risk management system for risks associated with derivatives investment and disclose to investors the information on such investments. Mutual funds need to have in place know you client procedures and disclose in the factsheet about the derivatives it intends to invest in and the resultant increase in market risk. There is also a requirement for mutual funds to conduct a suitability test to ensure their investors aren’t taking too much risk. In an emailed response, an SEC spokesperson added that asset management companies must, additionally, comply with rules governing derivatives investment which include rules on counterparty limit, reserved liquid asset requirement and investment ratio calculation in underlying assets. According to the TFEX, exchange-trade derivatives will be marked to market daily as per international practice. According to Nimmanpipak at Phatra, the new ruling will allow for more flexibility to securities firms to offer more innovative products to clients. “High net-worth investors already have exposure to exotic products through offerings by foreign banks, so there is already some demand in the market. This is, therefore, a good development to allow us to offer these products to our clients and allow more qualified and educated investors to trade domestic derivatives,” he says. September 2014
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EXPERT OPINION
WHAT HAS BEEN THE IMPACT OF THE HK SFC ET REGULATIONS ENFORCED IN JANUARY?
I
n early January Hong Kong’s securities overseer, the Securities & Futures Commission (SFC), enforced regulations that would ensure that algorithms used for trading are properly checked and tested before being deployed and that the end user is qualified to use the algos in the manner in which they were intended. It’s been nine months since this policy has run and we wanted to have a better understanding on just how Hong Kong’s brokerage industry has been affected. The top response in our opinion poll was that the regulations have benefitted the industry with 1/3 of respondents weighing in. It would have been good to learn how it has benefitted the industry but we can only surmise on those benefits. The second and third top responses came in at 25% of votes. One camp said that it has made electronic trading safer while the other thought the regulation came at a cost of stifling innovation. Is the overall industry at a higher utility with safer markets yet with less investment on improved products and services? One could argue if markets aren’t safe then there will be no investors
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to create products or provide services too. At the bottom end of our 5 responses with just over 8 percent each came enhanced risk control and reduced competition. Like the second and third responses above it looks as though there has been some give and take regarding the SFCs regulation. With greater risk there are safer markets but less competitors thus increasing trading costs and limiting services. One item worth mentioning is that the regulations do not specifically spell out the nature of compliance leaving room for interpretation. This puts the onus on the sell side to put in place audit trails, modify on-boarding procedures and save more documentation for several years. The buy-side too will shy away from complying with every broker and member firms will need an equally comprehensive compliance process. Trading errors happen every day in this business human or otherwise and we can expect the SFC to pass judgment on perceived lapses that will inevitably occur. We hope that they embrace both the spirit of the law rather than just the letter.
WWW.ASIAETRADING.COM
OPINION POLL
T
he Hong Kong Securities and Futures Commission’s regulations on electronic trading came into effect at the beginning of 2014. As the market was preparing to comply with the upcoming regulations, through our conversations with clients, we understood that some were reducing the size of their broker panels and asking us to limit their access to more advanced algorithms and highly customized solutions. At that time we took the view that the collective impact of these requests may potentially result in a less competitive landscape and may also stifle product innovation. With the benefit of hindsight, it now appears that these shifts were only temporary. A few months into the year, clients that previously requested a limited suite of algorithms were again asking us for new and innovative solutions, albeit in a far more controlled environment. Zoltan: What is your view on managing a broker panel under the regulation and its impact on product innovation? Emma: Following the announcement of the rules and the reality of the administration burden on investment managers and their broker partners, we observed a decrease in the number of brokers they had on their panels. Now there is further clarity on the administrative requirements under the regulation, I believe investment managers will slowly and selectively increase their panels.
on accommodating the diverse and increasingly sophisticated risk controls required by our clients, our systems and procedures became increasingly robust and customizable in the process.
Emma Quinn Head of Asia Pacific Trading, Alliance Bernstein Hong Kong Ltd.
Assessing the Impact of the HK SFC’s Electronic Trading Regulations In my view, gone are the days where investment managers are willing to take every new algorithm that is offered to them. I think managers are and will continue to be very selective in their choice of algorithms. This may result in some stifling of innovation although I do think that it means that resources will be better deployed on developing those algorithms that are really needed and not building something and then hoping people use it.
Zoltan: How have your relationships changed with the sell side and what are you hearing from your peers? Emma: I believe our relationships have been strengthened through this process. Through the initial phase and the days that followed, we needed to rely on our broker partners and they needed to rely on us. We all needed to be confident in each other’s abilities and assurances.
The regulatory change required us to work closely with our clients, as both sides were required to meet their respective obligations. Throughout this process, dialogue remained vibrant and we found that as they performed their due diligence, the process brought us closer with each completed round of requests. Furthermore, as we worked
Certainly one of the very positive impacts of the new regulation has been the collaboration that it inspired amongst market participants as each prepared to meet the new requirements. Numerous industry bodies joined forces to streamline the due diligence process that was required by users of electronic trading platforms to perform on their providers. The standard template developed as part of this collaborative process was widely used to help meet the requirements and has since become the focal point of further collaboration and standardization.
Zoltan Feledy Director, Electronic Trading Sales, Bank of America Merrill Lynch WWW.ASIAETRADING.COM
Zoltan: What are your thoughts on how the industry handled complying with this landmark regulation and its impact on electronic trading? Emma: It was extremely encouraging to see the industry come together to simplify and minimise the impact for all those affected by the regulations – the buy side, the sell side and vendors. In my experience, there have not been many occurrences where I have seen this happen, and with this high level of success. September 2014
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O&A
COLLATERAL MANAGEMENT IN ASIA: EIGHT QUESTIONS CLIENTS ARE ALWAYS ASKINGâ&#x20AC;Ś. Sam Ahmed explains the difference between management and optimisation of collateral, with an opinion on how to select the right model for your firm.
A
cross the industry, there is a lack of certainty about the best solution for managing collateral. Since 2011 I have engaged clients across Asia to understand their needs around collateral management and post OTC trading needs. From regional and local banks, to asset managers, hedge funds, insurance companies and sovereign wealth funds, the feedback from them has been unequivocally consistent. The sheer range of offerings from custodians, prime brokers, vendors, clearing brokers, consultants and other financial providers seems to be causing much dubiety amongst the buyside community. When a former client called me in mid-August
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O&A
to ask me what collateral optimisation really means, it prompted me to consolidate all such questions on paper with the aim of providing some clarity on some of the gray areas that exist around collateral management today in Asia. What is the fuss about collateral management? Are there any regulations that require large investments in a comprehensive collateral platform or outsourcing to an approved provider? While regulations such as the US Dodd-Frank Act and the European Market and Infrastructure Regulation (EMIR) do not explicitly advocate the need for a highly sophisticated vendor platform for collateral management, capital adequacy rules under Basel 3 do stress the importance of adequate credit risk mitigation controls, stringent collateral management policies for monitoring items such as liquidity coverage ratios, haircuts, concentration limits, rehypothecation of collateral as well as having sufficient resources dedicated to ensuring margin calculations and calls are done on a timely and accurate manner. By raising the bar for collateral management practices, regulators have left market participants scrambling to find solutions. The market however seems more fascinated with buzzwords like collateral optimisation and transformation without really understanding what their own inherent needs are. Isn’t collateral management and collateral optimisation the same thing? No. Effective collateral management as described above is a regulatory requirement. Collateral optimisation is not a regulatory requirement but an initiative many firms are undertaking to lower margining costs. In layman’s terms, collateral optimisation is the process of putting a value on all the assets that an institution holds and ranking them to ensure the lower grade assets are used first for margining purposes while the higher grade assets are reinvested thereby maximising the returns on a given asset and minimising opportunity costs. So then what is effective collateral management? Effective collateral management means that you are monitoring the terms of your margining agreement systematically and ensuring that all its obligations are met with your counterparties in an accurate and timely manner. This involves six steps: a. All the terms and conditions of your credit support annex (CSA - margining agreements) should be captured in a platform, which allows for systematic monitoring. These include collateral eligibility, haircuts & concentration limits on collateral, valuation methodology, frequency of margining, dispute WWW.ASIAETRADING.COM
management terms, settlement methodology, counterparty contact information, counterparty settlement information and etc. b. A valuation engine for margin calculation in order to markto-market both the underlying over-the-counter (OTC) trades, potential future exposure as well as the value of the collateral. This also requires price feeds from the relevant sources (Markit, DerivSource, etc). c. A reconciliation system that will allow for rapid dispute resolution in the event there is a break in the valuation between one’s institution and the counterparty. d. Connectivity to your custody & nostro accounts with eligibility parameters and instructions interface so at any one point in time you are able to view your inventory and choose the right asset to transfer across. e. Reporting functionalities: both intraday and end of day reporting (margin calls, inventory positions, net MTM by counterparty, failed settlements) should be available to the end user through an interface. A failure to have an effective collateral management platform may result in missed margin calls, or failed or incorrect settlement whose consequences may result in either huge losses in the event of a counterparty default or a downgrade of one’s own institution, should margin calls be missed. Are there any features besides the above that is essential to collateral management? Two important features are highly recommended: The system should have the ability to price and settle non-cash collateral, and it should have the ability to manage collateral for both cleared and non-cleared transactions using the same interface and platform So if a firm wanted to outsource their collateral management in Asia, who would they turn to? I would divide the competitive landscape of service providers into two. First there are the global custodian banks like BNY Mellon, State Street and Northern Trust. While all three banks have traditionally had strong ratings, healthy balance sheets and comprehensive collateral platforms, their offering is geared more towards meeting core collateral functionalities. This brings us to the next group of providers, Citi and JPM. While the actual collateral platform offering for core functionalities does not vary much compared to the custodian banks, both Citi and JPM have placed less emphasis on offering collateral as a stand-alone service. Instead both have undergone an internal restructuring to align their markets desks with custody services. The result has been the creation of a one-stop September 2014
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O&A OTC shop for the client with execution, clearing, collateral and custody being offered on the same assembly line. The ‘one-stop-shop’ strategy is a rather astute one in the current regulatory environment which demands a host of post-trade requirements for any buy-side client that engages in OTC trading. However my experience as sales head for collateral in this region suggests that both JPM and Citi should take heed with this strategy: “we do monitor concentration risk quite seriously and as such it is preferable for us to have a diversity of service providers” mentions a VP at an asset management fund in Asia. How did the focus turn from collateral management to collateral optimisation? Over the past three years, as OTC regulations became more defined, concerns on operational challenges of collateral management gave way to liquidity risk with market participants growing uneasy about a shortfall of eligible assets that could be used for collateral. These concerns saw a gradual shift in responsibility with the business wanting more oversight and control in how assets were being used to meet outgoing collateral requirements. This shift from a back-office administrative management of collateral to a front-office, cost-effective management gave birth to what we now know as the term collateral optimisation. Technology along with restructuring the ability to manage exposures across a firm’s business lines, can allow traders to factor in collateral usage as a pre-trade cost analytic rather than a back office functionality. So how does one start with a collateral optimisation solution? Is this better built in-house or should it also be outsourced? Collateral optimisation is a costly endeavour whether building in-house or outsourcing. The following five steps are required: • Create a virtual inventory: this means that all of the firm’s assets, whether its sitting in multiple custodians and/or nostro accounts should be viewed in a single virtual inventory with a similar treatment for all of the firm’s exposure’s across business lines (OTC, repo, sec lending, etc). This in itself is a tremendous risk management tool as it means on any given day, the firm has a real time assessment on all its exposures along with a holistic view of how much eligible collateral it holds across all business lines to cover this exposure. It also allows for simulations and stress testing on potential future exposures. •
Assign an opportunity cost to every asset that is deemed as eligible collateral. Most assets would derive value either from its repo use or from its securities lending platform.
•
Create a matrix with transaction costs that shows how much it will cost to move an asset from one jurisdiction to another factoring in components such as multiple custodian or subcustodian involvement.
• Create an advance numerical algo that allows collateral allocation by counterparty eligibility factoring in opportunity and transaction costs for each asset. •
Create a ‘what-if’ tool that allows the front office to determine the economic benefits of initialising any trade with a CCP
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or counterparty based on their margin requirements and eligibility schedule parameters. What should firms consider of the collateral management or collateral optimisation options? There is no one answer for all firms. It really depends on their size and nature. For example, if an institution has less than 50 CSA’s and its core business does not involve trading derivatives, (e.g. asset managers hedging their exposures) then outsourcing core collateral management is possibly the best choice. Forget collateral optimisation. If your institution already has a collateral team and more than 20 CSA’s and you are looking to expand, then a vendor platform makes the best sense as you retain your staff and train them but also get to upgrade to a more sophisticated system. Again the number of CSA’s is too low for investing in an optimising engine If your firm has more than 150 CSA’s and looking to expand immediately: a vendor system would probably be more favourable over an outsourced solution in terms of costs but an outsourced solution would have the benefits of being implemented sooner. If your firm has over 150 CSA’s and has a long-term plan to find the right collateral solution, then building an in house proprietary system is best. My own personal view of collateral management in Asia: Approximately 85% of the clients I surveyed in Asia between 2011-2013 are using cash only. The rest are using a combination of cash, US Treasuries and local government bonds. In my view, we will see a shift in the next three years towards using a lot more local high-grade assets and government-backed debt in this region. So for any firm that has a long term view of investing in a platform along with the budget, there is no better solution better than developing an integrated platform in-house which incorporates an execution platform, a front-end optimiser, a backend collateral system all linked via straight-through processing to settlement, finance, credit and risk systems. This is not only the most tailored and optimal solution but once tested and used successfully by the firm’s stakeholders has the added benefit of being deployed for the firm’s internal clients either through a fee based service or through white labeling. Collateral management in Asia, like the OTC landscape, is only at an infancy stage. Success in an optimal collateral model is very much tied to success with anything in Asia: have a long-term view, invest, believe in the growth of this complex region and be patient about the wave of returns to come. If you build it…. they will come! Sam Ahmed is an industry expert on OTC derivatives and collateral management practices in the APAC region. Sam spent the past 18 years working in banking from on roles ranging from an FX Derivatives trader at Lehman Brothers Japan, to heading various derivatives trading desk support teams for Merrill Lynch in Tokyo and Singapore. His last role was Head of Collateral Services Sales for APAC with Citi. Sam holds a Bachelor of Economics Degree from Macquarie University, Australia, and a Post Graduate Diploma in Japanese Studies from OLJ Language Academy,Tokyo,Japan. WWW.ASIAETRADING.COM
EQUITIES
RECAP JUN-JUL 2014
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EQUITIES
Asia Exchange Trade Count July 2014
* Change data are from June 2014
Source: Thomson Reuters Equity Market Share Reporter
Asia Exchange Average Trade Size July 2014 (USD)
* Change data are from June 2014
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EQUITIES
Liquidity 30.000 25.000
Spread (bps)
20.000 15.000 10.000 5.000 0.000
MSCI Asia Pacific Ex JP
Hang Seng
TaiWan TAIEX
NSE S&P Nifty
S&P/ASX 200
Kospi 200
Straits Time
Market Impact 40.000 35.000 30.000
Impact (bps)
25.000 20.000 15.000 10.000 5.000 0.000
Hang Seng
NSE S&P Nifty
Kospi 200
Parent Order Size (%ADV)
Value Share Trading July 2014 (USD)
Source: Thomson Reuters Equity Market Share Reporter
Total $2,005,645,659,286 (19.56%)
* Date in brackets are change from June 2014 WWW.ASIAETRADING.COM
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FRAGMENTATION FOOTPRINT AUGUST 2014
FRAGMENTATION
Highlights august 2014 Turnover
Market Share
Volume billion
Billion USD
Nikkei 225%
shares
TSE
$452.37
93.30
52.27
SBIJ
$19.56
4.40 2.30
Chi-X Japan $8.61
Avg Trade
Average Trade
Size USD
Size Shares
25,338,184
$12,570
1,408
2.33
2,658,169
$4,078
475
0.98
1,955,499
$4,404
488
Japan
Trades
Figure: 1 4.5
SBIJ 4.40% ChiJ 2.30%
Chi- X JP Nikkei 225 Market Share Value %
4.0 3.5
Nikkei 225 Market Share Value %
3.0
August trading volumes in Japan were lower by around 10% month over month generating US 480 billion across all venues. The summer holidays and extremely low volatility (see page 19) were contributing factors. The PTSs saw the effects of this environment with lower price improvement (PI), lower
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2.5 2.0 1.5 Sep 6 2013
Nov 22 2013
Feb 14 2014
May 2 2014
Jul 18 2014
Source: Chi-X Japan website
WWW.ASIAETRADING.COM
FRAGMENTATION Figure: 2
Figure: 6
TSE Average Trade Size USD
SBIJ Nikkei 225 Market Share Value % 7.50
18,000
7.00
17,000
6.50
Nikkei 225 Market Share Value %
6.00 5.50 5.00
16,000
TSE 14,000
4.50
13,000
4.00
12,000
Dec 23 2013
Mar 10 2014
May 26 2014
Aug 11 2014
2013-09
Source: SBIJ website
Chi-X JP Average PI (bps) 6.5 6.0 Average PI (bps)
5.0 4.5 4.0 Nov 22 2013
Feb 14 2014
May 2 2014
Jul 18 2014
Source: Chi-X Japan website Figure: 4
SBIJ Top Stocks by Market Share
SBIJ Price Improvement Profile (bps)
25.00 20.00
Large Cap Avg PI (bps)
15.00
Medium Cap Avg PI (bps)
10.00
Small Cap Avg PI (bps)
5.00 0.00 Aug 26 2013 Nov 11 2013 Jan 27 2014 Apr 14 2014 Jun 30 2014
Source: SBIJ website Figure: 5
7,000 6,500 6,000 Chi-X Japan SBI Japannext
5,000 4,500 4,000
2013-09
2013-12
2014-03
2014-06
Symbol 5007 8327 2875 2670 4088 4612 8377 7003 2206 4631
% Primary PI (bps) Value (JPY) Name 19.09 21.88 1,618,158,500 COSMOIL 14.74 18.39 1,996,922,100 NINPC-BK 5.73 18.24 4,036,415,000 TOYOSUI 5.33 18.08 3,996,249,800 ABCMART 4.52 17.95 1,811,924,200 AIR-WAT 3.53 17.31 9,762,205,900 NP-PANT 18.15 17.17 HOKUHOKU 1,393,242,900 17.99 16.63 3,499,692,400 MTI-E&S 5.54 5,434,623,500 16.3 E-GLICO 16.57 16.3 4,441,283,900 DIC
ChiX J Top 10 Large Cap Stocks by Market Share
PTS Average Trade Sizes USD
5,500
% Primary PI (bps) Value (JPY) Name 5.19 4.01 49,588,936,550 MIXI 1.6 2.63 33,323,039,900 SOFTBNK 3.88 3.06 24,694,922,250 COLOPL 1.81 2.74 20,984,946,700 TOYOTA 2.36 6.61 17,523,619,500 FASTRET 3.39 1.66 17,277,521,962 NIKKEILV 5.08 3.58 16,725,622,140 MIZUHO 3.94 3.52 CYBRDYNE 15,854,574,530 2.99 2.98 15,762,011,210 KLAB 9.87 14.62 15,534,691,100 MTI-OSK
Symbol 6861 1963 6273 8630 8830 8795 4503 8001 2802 1605
Name KEYENCE JGC SMC SOMPJPNK SMIRE&D T&DHD ASTELLAS ITOCHU AJINMTO INPEX
PI (bps) 0.9 1.9 1.0 0.8 0.9 1.0 1.7 0.8 1.1 1.1
% Primary 9.85% 3.91% 3.48% 3.41% 3.12% 2.96% 2.81% 2.81% 2.75% 2.71%
Source: Thomson Reuters Equity Market Share Reporter
WWW.ASIAETRADING.COM
Source: SBIJ August Statistics Report
5.5
Symbol 2121 9984 3668 7203 9983 1570 8411 7779 3656 9104
Source: SBIJ JAugust Statistics Report
SBIJ Top Stocks by Turnover
7.0
30.00
2014-05
Figure: 7
Figure: 3
3.5 Sep 6 2013
2014-01
Source: Thomson Reuters Equity Market Share Reporter
Source: ChiX J August Statistics Report
3.50 Oct 7 2013
TSE
15,000
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FRAGMENTATION average trade sizes and SBIJ market share returning to its Phase 1 STPP (Small Tick Pilot Program) lows of just around 4.4% (Figure 2). ChiJ seems to be consolidating at the 2.2% (Figure 1) share since STPP. Its market share doesn’t appear to be affected by a change in aggregate turnover but perhaps by volatility. The stand out items for the last 2 months were the reduced PI on both the PTSs and average trade sizes on all liquidity pools. ChiJ (Figure 3) data only provided overall PI where SBIJ (Figure 4) provided PI by market capitalisation (Figure 7 show ChiJ’s market share for its top 10 large cap names and they average just 1.1bps of PI). It’s clear that something triggered this reduction but we don’t think it was Phase 2 of STPP as that only affected the smallest cap stocks. We can see that on the SBIJ chart it was concentrated at the higher end of the market and is likely a symptom of the low volatility which hasn’t been this level since 2006. It will be difficult for a fund to justify to on-board at a PTS if they would only realize 1bp of PI on only
some of their trades. The lower average trade size across the board is unusual in that there is low volatility yet the market is approaching its one year high. A higher market means share prices are more expensive so it follows that trades by share must be decreasing. The low volumes wouldn’t suggest high frequency trading but the smaller trades per share would. The market structure is strange indeed! Turning to the top 10 names by turnover there are no common securities between the PTSs at least in August. Normally, there is one or two but we see a change here as well. SBIJ’s top 10 appear to be mid cap stocks as the PI is above average though Mizuho (8411) shows more than 5bps. As noted above, PI on ChiJ names is averaging 1.1bps. SBIJs top 10 names account for about 25% of total venue turnover while ChiJs account for just over 50%. The latter needs to diverse its trading outside of large cap securities.
Highlights august 2014 Turnover
Market
Volume billion
Billion USD
Share %
shares
ASX
$71.04
87.95%
34.88
Chi-X Australia
$9.73
12.05%
4.56
Avg Trade
Average Trade
Size USD
Size Shares
17,019,645
$4,174
2,126
3,226,127
$3,016
2,857
Trades
Australia Figure: 8
Chi-X Aus Market Shares
Chi-X Aus 12.05%
Continuous Trading % Total Market %
19
August turnover was higher in Australia compared to July surpassing US80 billion across all venues as the benchmark continues to trend higher.
14 9 Sep 6 2013
We have been seeing that ChiA has been increasing market share from its off exchange trading rather than its on (Figure 5). Since mid-June they have reported an average of 4.16% of total trading for Australia or 23% of trading at Chi-X or about A$2.4 billion for August. This compares to 1.4% of total Aussie turnover or just under 10% of Chi-X for the first half of the year. We are hearing that more buy-sides are looking for liquidity that can’t be found on exchange and this data would seem to support that. In stark contrast to its Japanese counterpart are the PIs enjoyed by ChiA (Figure 9) boasting 28bps on 34% of its trades. PI has been improving since early April reaching a high of 28.5 during the week of April 8 – 15 where volatility spiked from
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Nov 15 2013
Jan 24 2014
Apr 4 2014
Jun 13 2014
Aug 22 2014
Source: Chi-X Australia website
10 to 15 after the market corrected and continued its rally. ChiX appears to find better executions in increasingly volatile markets. Just as an aside, the TSE is about 8 times the size of ASX yet their PTSs struggle unlike ChiA which traded nearly US 10 billion in August at 12.05% market share more than ChiJs US 8.6 billion and 2.3% share. Who would have thought that as big as Japan is that Australia is the market where competition WWW.ASIAETRADING.COM
FRAGMENTATION Figure: 9
Price Improvement Chi-X Australia From Aug 2013
is yielding higher dividends. Either Japan is very efficient or the PTSs are having a hard time of it. Figure 10 shows both ASX and Chi-X average trade sizes increasing reflecting the higher priced securities in an up market. Nothing noteworthy to report here.
42.00
37.00
% Trade PI
32.00
Average PI (bps)
27.00
22.00 Sep 6 2013 Nov 22 2013 Feb 7 2014 Apr 24 2014 Jul 11 2014
Source: Chi-X Australia website Figure: 10
ASX and Chi-X Australia Average Trade Size USD
The top 5 securities by market share and turnover are for the week ending 29 August and we can see that there is liquidity in the big names on Chi-X have low PI. We would have expected to see higher PI given how much seems to be available. This leads us to believe that the high PI they are reporting are in the smaller less liquid names. We like to talk about Centre Point (CP) as we always do. It is counted as display trading even though it is a dark order type. For July (August data wasnâ&#x20AC;&#x2122;t available) the venue executed A$5.8 billion slightly down from its May high but indeed a good result. TLS, SCG and FMG were the largest names accounting for 14.8% of total Centre Point trading. TLS was ChiXâ&#x20AC;&#x2122;s top name by value yielding 11.68bps of PI where CP reported 9.5bps.
4,000
3,500
ASX 3,000
Chi-X Aus
2,500
2,000
2013-09
2013-11
2014-01
2014-03
2014-05
2014-07
Source: Thomson Reuters Equity Market Share Reporter
Figure: 11
Chi-X Australia Top Stocks by Market Share % Symbol GPT TTS SCG QAN GMG
Share % 26.59 24.37 23.93 23 22.21
Value A$ 5,502,708 2,188,628 5,401,081 3,239,249 2,161,521
Avg PI (bps) 16.77 19.56 19.78 24.13 12.36
The Top 5 participants on CP were no surprise with UBS, Merrill Lynch, Morgan Stanley, Macquarie and Deutsche executing around A$5.5 billion. This data is double counted as UBS sold to Merrill Lynch, for example, and both trades appear in turnover data. Average trade size came in around A$3200 slightly higher than ChiX but lower than the primary. The ASX Cash Market Report for 29 August shows that broker dark pools executed around 4.1%. Slightly improved since the updated best execution rules came into effect but no different than say Hong Kong. It also reports ASX market share as 82.4% to ChiXs 17.6%. Display trades account for 66% of total Australia trading and 34% non-display. Note: Values calculated for the fragmentation report do not include primary auction data and will vary from the values found in our Asia equity trading recap which does include auction data.
Chi-X Australia Top Stocks by Value Symbol TLS BHP WBC ANZ NAB
Value A$ 28,727,289 23,530,167 17,052,328 14,920,164 14,708,013
Share % 21.64 13.24 19.03 18.13 15.64
Avg PI (bps) 11.68 2.17 2.47 2.4 2.4
Source: Chi-X Australia Weekly Trading Report Aug 29, 2014
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FRAGMENTATION
MARKET FRAGMENTATION HIGHLIGHTS
AUSTRALIA By Tina Timneva, Senior Research Analyst Fidessa
In previous issues we have looked at fragmentation levels in Japan, both for equities and ETFs. In this issue we turn to Australia to see how the market fragmentation story is unfolding there and whether market competition is settling. Fragmentation levels for Australia’s main index (S&P ASX 200) have remained stable over the past year and the weekly FFI for July 2014 was close to 1.20 (Chart 1). This value corresponds to a market share for Chi-X Australia, the country’s alternative venue, of around 10%. Looking at the single stock level, some of the top fragmented ASX 200 constituents for July 2014 show FFIs ranging from 1.70 (Lynas Corporation) to 1.39 (Arrium Limited) (Table 1). This indicates market shares for Chi-X Australia of 31% and 17% respectively, levels significantly exceeding the 10% mark at which typically, venues begin to attract buy-side liquidity.
Source: Fidessa
Table 1
Following some fluctuations in trading velocity on the ASX in the middle of 2013, levels have fallen back and continue to remain stable in 2014 (Chart 2). Taking two of the most liquid stocks, BHP Billiton and Telstra Corporation, liquidity at this level has remained stable in spite of price fluctuations, as seen in Charts 3 and 4.
Top 10 ASX 200 stocks by FFI (July 2014)
Rank
FIM
Description
FFI
1.
LYC.AX
LYNAS CORPORATION NPV
1.70
2.
SXY.AX
SENEX ENERGY LTD NPV
1.50
3.
PDN.AX
PALADIN ENERGY LTD NPV
1.50
4.
ENV.AX
ENVESTRA NPV
1.46
5.
AGO.AX
ATLAS IRON LIMITED NPV
1.45
6.
BWP.AX
BWP TRUST NPV
1.43
7.
PBG.AX
PACIFIC BRANDS NPV
1.41
8.
NWS.AX
NEWS CORPORATION CDI NPV CLASS B DFD
1.40
9.
HZN.AX
HORIZON OIL LTD NPV
1.40
10.
ARI.AX
ARRIUM LTD NPV
1.39
Table 2
Source: Fidessa
Table 2 shows the top 10 ASX 200 stocks by consideration. It is interesting to see that the FFI for this group is lower, around the index average FFI for July 2014, with the lowest value at 1.09 (Rio Tinto) and the highest at 1.32 (Fortescue Metals). Stocks in this group also show less fluctuation in FFI over time compared to the top fragmented group, e.g. Lynas Corporation (Chart 1). One possible explanation could be the large trades executed on one venue during index rebalancing.
Top 10 ASX 200 stocks by consideration (July 2014)
Rank
FIM
Description
FFI
1.
BHP.AX
BHP BILLITON LTD NPV
1.15
2.
CBA.AX
CMNWLTH BK OF AUST NPV
1.11
3.
NAB.AX
NATL AUSTRALIA BK NPV
1.19
4.
WBC.AX
WESTPAC BKG CORP NPV
1.23
5.
ANZ.AX
AUST & NZ BANK GRP NPV
1.22
6.
RIO.AX
RIO TINTO LIMITED
1.09
7.
FMG.AX
FORTESCUE METALS G NPV
1.32
8.
TLS.AX
TELSTRA CORP LTD NPV
1.32
9.
WPL.AX
WOODSIDE PETROLEUM NPV
1.14
10.
WOW.AX
WOOLWORTHS LTD NPV
1.15
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FRAGMENTATION FIDESSA FRAGMENTATION INDEX ASX 200
BHP.AX
LYC.AX
1.90 1.80 1.70 1.60 1.50 1.40
Source: Fidessa
1.30 1.20 1.10 Jul 14
Jun 14
May 14
Apr 14
Mar 14
Feb 14
Jan 14
Dec 13
Nov 13
Oct 13
Sep 13
Aug 13
Jul 13
Jun 13
May 13
Apr 13
Mar 13
Feb 13
Jan 13
1.00
Chart 1
AUSTRALIAN STOCK SECURITIES Turnover velocity
FFI
1
1.60 1.50
0.8
FFI
1.30 0.4 1.20 0.2
1.10
0 Jun 14
May 14
Apr 14
Mar 14
Feb 14
Jan 14
Dec 13
Nov 13
Oct 13
Sep 13
Aug 13
Jul 13
Jun 13
May 13
Apr 13
Mar 13
Feb 13
Jan 13
1.00
Chart 2
Chart 2
BHP BILLITON
Chart 3
Chart 4
Source: Fidessa
Source: Fidessa
TELSTRA CORPORATION
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Source: Fidessa
Velocity
1.40 0.6
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EQUITY STORY
Shilesh Shekhawat HEAD OF ELECTRONIC TRADING SOLUTIONS, ASIA
ASIA ETRADER SPEAKS TO SHILESH SHEKHAWAT, HEAD OF ELECTRONIC TRADING SOLUTIONS, ASIA, J.P. MORGAN AND ED DUGGAN, HEAD OF ELECTRONIC CLIENT SOLUTIONS, SALES & TRADING, IN APAC FOR J.P. MORGAN ABOUT THE CHALLENGE OF TACKLING CUSTOMER DEMAND ACROSS A RANGE OF DIFFERENTLY MATURING ENVIRONMENTS.
How did you get started in electronic trading? Ed Duggan (ED) – I came through the projects office at my first firm early in my career, before moving into high-touch sales trading for five years. I moved into electronic trading to set up what became the coverage desk common to all electronic businesses whilst still at my prior firm. Shilesh Shekhawat (SS) – I had just relocated to Japan at the beginning of 2005, when my previous employer started to look at building and launching algos and electronic trading in Japan. I happened to be there to help! 2) What has been the impact to the industry the HK SFC regulations that came into effect in January this year? SS - It absolutely has been a step in the right direction. It provided the opportunity to both the buy- and sell-side to revisit the controls that had been in place around electronic trading, ensuring the appropriate level of governance and sufficient due diligence are in place, as well as providing training for the client base. 3) How has the use of algorithms changed over the past few years? ED – Algorithms and their users have become more sophisticated. Initially time- or schedule-based, algos have developed to become a toolkit which encompasses most of the dealers’ needs, although they will never replace human interaction in the market place. 4) Has the small tick pilot programme in Japan changed the way buy-side firms are using algos? How so? SS – While it is still early days since the introduction of the programme’s second phase in relation to additional stocks, we haven’t observed any material difference in the way the buyside is using algos or the actual usage of algos themselves. It has resulted in better absolute performance of algorithms and
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EQUITY STORY
Ed Duggan
HEAD OF ELECTRONIC CLIENT SOLUTIONS, SALES & TRADING, IN APAC reduced cost of trading.
be changing the way it trades.
5) Is the Shanghai-Hong Kong Stock Connect initiative going to benefit trading and liquidity or is it just another cost the sell-side will have to bare? SS – We are very optimistic about the prospects of the Shanghai – Hong Kong Stock Connect initiative. It will provide mutual market access to investors who traditionally have not had access to these markets, simplify access for China A-shares and boost liquidity in both markets. Given the complex nature of the initiative, it may be that investors will need to absorb a cost in relation to their participation - especially during the program’s early days. That said, we see the medium- to long-term benefits far outweighing any early challenges.
9) How important has execution consulting become in Asia? ED - As many dealers will attest to, actually getting the business done in Asia is a task in itself, compared to other regions. Execution consulting is one way in which we can smooth out the bumps. It is important as it uses quantitative data to draw conclusions on how the use of alternative trading strategies changes the outcome of a trade. There will always be an intensive buy-side review of trading, so execution consulting offered by brokers can be a value-add to common existing practices for the buy-side.
6) Is fragmentation dead in Asia? SS – No it is not. As long as there is any form of off-exchange trading, there will be other venues to trade on. 7) What questions/concerns from Europe and US buy-side arise with respect to trading in Asia? SS – With the number of different markets in Asia, there are many trading nuances around those markets including differences in their market structure as well as the implicit and explicit costs of trading. Most of the questions from US/EU buy-side are around understanding these nuances. 8) TCA is moving to the mainstream in Asia in what has been a predominantly VWAP market. What kind of visibility into execution quality are buy-side firms looking for? ED - Dealers require a way to measure the effectiveness of their trading strategy against a range of benchmarks. Increasingly they are also looking for smart ways to interrogate their data in order to understand trends in the flow they deal. Peer group analysis provides insight into how the market as a whole might WWW.ASIAETRADING.COM
10) Are customers asking for algo’s outside of the equity asset class? What kind of features are they looking for? ED - Customer focus has started turning to algos for trading FX and futures in particular, although equities remains the foremost asset class in its embrace of electronic dealing tools. 11) What is the current state of commission-sharing arrangements (CSAs) in Asia and what are your clients asking for in terms of implementing them across the region? ED - CSAs are becoming well established in the region, particularly amongst the global account base. I see this trend continuing, notwithstanding the significant administrative and time costs associated with establishing a CSA. 12) What are some of the challenges for program trading in Asia and how are you overcoming them? ED - Program trading in Asia is arguably more important than in other regions due to the complexity of multiple market nuances, regulations and other variations present existing in Asia. At J.P. Morgan, we are actively engaged with our clients around overcoming some of the challenges that Asia presents.
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POST TRADE
K
evin Rideout, Asia Pacific head of wholesale execution services at Citi, says Hong Kong custodians will have their work cut out for them in “terms of identifying cut-off times and make settlement arrangements for T+0 if they want to offer delivery versus payment/ receive versus payment, which long-only investment managers will likely insist on.” Trading firms and their post-trade service providers will need to negotiate risk management, quota, and price limit issues on the pre-trade side and the ability to abide by local trading rules for north-bound orders including short selling, day trading and price limit restrictions. Post-trade processes will involve monitoring for market manipulation, front running and insider trading, managing T+0 settlement and the resolution of data integration issues. Clearly authorities want the link to be a success. Initially the Link’s settlement cycle worked on a de facto T-1 cycle, as the T0 process was not supported by an intraday movement of stock between custodian and broker. As these movements were only settled at 7.30pm, the trader would be required to move stock or cash the day before in order to be ready to trade the next day. That in turn exposes the buy-side trader to counterparty
risk with the broker. Following industry feedback, a 7.45am settlement batch was added to the cycle, that could enable traders to move assets on the same day as the trade which was to take place. This still has severe limits – typically only US and European players will have resolved how to trade Hong Kong by 7.45am local time, and the requirement to post cash and securities at the point of trading is harder to manage than a T+2 settlement cycle. Nevertheless market participants say that it shows resolve. Market operator Hong Kong Exchanges and Clearing (HKEx) has moved the project to the top of the agenda and is believed to have pushed other important initiatives such as a planned consultation on a closing auction and the introduction of trading controls or circuit-breakers down the list. Moreover, the Hong Kong Securities and Futures Commission (SFC) is thought to have delayed some of its reforms including those focusing on dark pool until after the launch. Stephanie Marelle, head of Hong Kong and custodian BNP Paribas Securities Services notes that the China Securities Regulatory Commission (CSRC) and SFC have shown their commitment and flexibility in making the project work and that time exists to tackle issues as they arise. “The six-month preparation timeframe (from April to October) will allow for blips to be ironed out, systems tested and re-
By Lynn Strongin Dodds
FLEXIBILITY NEEDED ON HONG KONGSHANGHAI LINK POST-TRADE The Hong Kong and Shanghai Stock Connect platform is set to launch in October, but post-trade connectivity and processing may hamper interest amongst traditional investors. 42
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POST TRADE regulators and exchange participants, prior to launching the project and during the preparation period, has indeed been encouraging with a focus on all operational aspects of this unique initiative.”
“It must be said that the consultation that is taking place between all the stakeholders...has indeed been encouraging with a focus on all operational aspects of this unique initiative.” Stéphane Loiseau Head of cash equities for Asia Pacific & deputy global head of executions services at SG CIB
designed, rules to be more aligned, and trading structures and processes to be established,” she says.
HISTORY REMEMBERED
Exchange officials have been working assiduously to avoid repeating the failure of a similar plan - the ‘through train’ - in 2007 which collapsed partly due to the ensuing financial crisis. They were also keen to prove that they could meet the self- imposed October deadline which some had criticised as too tight. This is perhaps why a sigh of relief could be heard when the 97 exchange participants accounting for 80% of total market turnover sailed through the first round on 30 – 31 August. The second spate of testing is slated for 13 September, according to HKEx. “The recent market rehearsal on the 30 and 31 of August appeared to run smoothly and participants’ feedback was good,” says Michael Karbouris, head of business development, Asia-Pacific, Nasdaq OMX. “An October go-live appears to be on track.”
FINAL DETAILS
Karbouris believes that most of the foundations have been laid, and that the remaining work has good built up a good level of momentum. “For go-live the following conditions need to be fulfilled trading & clearing rules and systems will need to be finalised and all regulatory approvals need to be granted,” he says. “In addition, all necessary investor education programmes must be in place and market participants have to adapt their operational systems. Most of the above are already complete if not well on their way to being complete.” As for HKEX market participants, he notes brokers will need to apply for participation, have an account with the Central Clearing and Settlement System, attend mandatory market rehearsals and be subject to all existing regulations under HK’s Securities and Futures Ordinance. “The challenge will be making the process so automated that it will become common practice vis-a-vis other markets, and making the settlement process feel like nothing out of the ordinary,” says Rideout. Karbouris adds, “Overall the impact of the link is yet to be seen. On the positive side, we could see an increase in liquidity both north and south bound, a successful market access programme leading to the opening of other market access programmes and a relaxing of parameters of the programme. And that under successful co-operation with the SFC the mainland market may ‘inherit’ the relatively more mature market integrity culture of the SFC. On the negative, it is possible that the programme will not see the anticipated volumes, or alternatively that the real or perceived lack of maturity in CSRC regulation as compared to SFC may erode certain aspects of regulation in HK.”
The link is more far-reaching than the through-train, which would have allowed mainland Chinese investors to directly buy shares listed in Hong Kong. It will mark the first time that international investors can trade Shanghai ‘A’ shares via the Hong Kong stock exchange while mainland investors will be able to trade Hong Kong ‘H’ shares via the Shanghai Stock Exchange, subject to quotas both ways. For example, the combined daily trading would be capped at 23.5 bn renminbi, which is equal to about 20% of the combined average daily trading turnover of both markets. Despite the optimism, the task is monumental with the trading link requiring an unprecedented level of coordination between multiple parties. Stéphane Loiseau, head of cash equities for Asia Pacific & deputy global head of executions services at SG CIB echoes these sentiments. “It must be said that the consultation that is taking place between all the stakeholders, including both exchanges, WWW.ASIAETRADING.COM
“The challenge will be making the process so automated that it will become common practice vis-avis other markets, and making the settlement process feel like nothing out of the ordinary” Kevin Rideout Asia Pacific head of wholesale execution services, Citi September 2014
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TECHNOLOGY
HFT RACE THREATENS STABILITY FOR ASIAN EXCHANGES Pressure for performance may be driving exchanges to chase illusory volumes
A
lmost every major exchange in Asia has now embraced low-latency, high volume trading platform to attract high-frequency and high volume algorithmic traders. The step up in technology has seen exchanges in the region struggle with balancing the speed and stability of their trading platforms, with technical outages becoming a recurring issue in the region’s trading landscape. According to David Jenkins, head of business development for Asia Pacific at trading system supplier Fidessa in Hong Kong, exchange outages are an expected outcome of the current environment as both trading venues and market participants struggle to manage their operational risk more effectively. “There is an evolution that is going through in electronic markets, and time will tell how that will bear out. Until then, glitches in the trading infrastructure will be inevitable as we are in an unprecedented technological evolution and system outages are one of its unintended consequences,” he says. The merger of the Osaka Securities Exchange (OSE) and the Tokyo Stock Exchange (TSE) has prompted a large-scale revamp of the newly formed Japan Exchange Group’s derivatives trading platform J-Gate to match the high-speed platform in its equities division, arrowhead. The Hong Kong Exchange (HKEx) is currently implementing its Orion Technology Initiative which will gradually replace trading and data platforms across its securities and derivatives offering. Similarly, the Australian Securities Exchange (ASX) and Singapore Exchange (SGX) have been at the
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forefront implementing changes in their trading infrastructures to allow greater participation by high frequency traders. Even in largely domestic markets like India and Taiwan, the local bourses have successfully upgraded their trading infrastructures to reduce latency and boost trading capacity. The Bombay Stock Exchange (BSE) has adopted Deutsche Börse’s trading platform in a bid to attract the international trading community, while the Taiwan Stock Exchange recently rolled out its Fully Automated Securities Trading System (FAST) to boost capacity. Stuart Gurr, Singapore-based head of global trading technology and market and credit risk at broker RBS Global Markets, says that the current technological arms race may be making trading infrastructures more complex. “There is a danger that organisations are buying too many specific products, resulting in the addition of unnecessary complexity to platforms, when what they should be doing is to ruthlessly simplify, to create platforms that are much more amenable to cross-product trading across FX, rates and equities,” he says. Outages in the region have been widespread and across the technology stacks, indicating the impact of pressure on the industry as a whole. The OSE’s March 2013 outage was due to a fault in the software of J-Gate. SGX suffered two outages, an error in back-office maintenance activity in 2013 and a network hardware issue in 2014. The ASX has suffered numerous glitches over the past few years with issues ranging from power failure to an inability to process market announcements. Most recently, the BSE suffered a network outage in early July this year, which left a large number of market
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TECHNOLOGY
participants unable to connect to the trading platform.
between 30-40% of trading in Japan.
It is clear that operating and maintaining sophisticated technology while managing corresponding operational risks has become increasingly challenging for exchanges. Jenkins at Fidessa adds that faster trading means that exchanges must focus on technology that is robust and resilient but still highly performing.
Managing the problem As the frequency and seriousness of trading outages have gone up, exchanges have woken up to the importance of risk management and overall stability of their platforms. RBS’ Gurr says that for many market players, the priority is no longer about being the fastest, but about being consistently quick under all market circumstances, including during periods of high market volatility.
“This is leading to technological exposure when you’re running at the high speeds that exchanges are running at today,” he says. Whither HFT? This focus on lower latency by exchanges is puzzling at first as most institutional investors investing in Asia prefer stable trading platforms to those that are merely quick, says Clare Witts, head of client relationship management and marketing for Asia Pacific at ITG. Furthermore, high-frequency trading (HFT) is fast coming off its peak in more developed markets in the US and the UK – the World Federation of Exchanges reported this year that HFT market share in the US came down to 51% in 2012 from 60% and predicts it will fall to almost 42% by 2020. However, explains Tokyo-based Neil Katkov, senior vice president for Asia at analyst house Celent, fees from transactions form a large chunk of the exchange’s revenue stream along with IPO’s. So attracting the low-latency community is becoming more and more important for Asian exchanges competing for a larger chunk of liquidity coming into Asia. “Low-latency players may not necessarily stay in Asia if the corresponding infrastructure isn’t in place. They’re not working on a global mandate so HFT money risks flowing away from an exchange if it doesn’t put in a low-latency system,” he says. Katkov further adds that supporting HFT has been a fundamental driver of technological upgrades at the TSE and now comprises
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“We are witnessing a natural maturing of the market as the sellside is moving away from the diminishing returns of the lowlatency game to focus on stability and the exchanges will likely undergo the same process. In particular, we are seeing this in the large Asian exchanges of Hong Kong, Singapore and Tokyo,” he says. Further, markets with greater internal competition, like Japan and Australia that allow proprietary trading systems (PTS) have helped manage a part of the risk for market participants: “having access to alternative trading venues has significantly improved the management of technology risks for banks, especially when a liquidity provider experiences an outage,” says Gurr. Katkov says operational risk management at exchanges must be of greater focus among regulators. “Exchanges are quite important to the financial system of any country so regulators should keep a closer eye on how they manage operational risk. The move to low latency could drive greater attention to this aspect of the exchange’s business,” he says. Notwithstanding regulatory interventions, operational risk management is already gaining the focus of both the trading venues and market participants. “In most cases, market participants want to exceed regulations because the last thing they want to be is the entity on the front page causing a flash crash or experiencing a system outage in any market. Compliance is more stringent than it has ever been; the industry is trying its best to cope in a fairly unprecedented environment,” says Fidessa’s Jenkins.
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CONTENTS
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