Asia Etrader Magazine Issue 5 by Asia Etrading

AsiaEtrader Issue 5 | Volume 1

heading

I 2013 Q1

The Electronic Trading Resource for Asia

Asia Algo Survey 2012: What the industry said

Whatâ&#x20AC;&#x2122;s in store for 2013 Well-connected PT desks Manchusree talks Thai futures Much ado about TKO

Asia Etrading Year In Review Asia Liquidity Forum

leader

AsiaEtrader Issue 5 | Volume 1

HEADING

I 2013 Q1

The Year Ahead

The Electronic Trading Resource for Asia

Asia Algo Survey 2012: What the industry said

Another year has come and gone and for some of us we are probably grateful. For us it was an interesting year as What’s in store for 2013 Well-connected PT desks Manchusree talks Thai futures Much ado about TKO

we began to create this magazine and raise the bar in terms of content for our audience. We are one year old now and one year wiser.

Asia Etrading Year In Review Asia Liquidity Forum

This

CREDITS

Contributing Writers Roger Aitken roleoa@aol.com

(our

biggest

yet)

will

look at the past year and record its

Editor-in-Chief Stephen Edge steve@asiaetrading.com Managing Editor Dan Barnes dan@icorp.co.uk

issue

highs (mergers and ASEAN) and lows (regulations and liquidity). We also bring to you the abridged results of our first Asia algorithm survey. Some interesting insights to be found within. We held two forums last quarter on the liquidity

Stephen Price steveprice@ymail.com

challenges in Asia and the TSE OSE merger and provide coverage on those.

Shri Navaratnam shri12.navaratnam@gmail.com

Of course, the magazine wouldn’t be complete without our market structure

Hongsong Chou hongsong.chou@cradvisors.com.hk

updates, opinion, analysis and an interview with one of the rising starts of

Frederic Stephan fredericstephan@yahoo.com

Asia’s electronic trading industry.

Matteo Rosin info@ithinkgraphic.com Cover Design Nadia P. nad3e9@gmail.com

The year of the snake is just a few weeks away and not only that it is a water snake. They are said to be influential, insightful and ideal for managing organizations. If we can get over the anemic markets and have some clarity

Graphic Design Mariel Closa dc.works.group@gmail.com

from the regulatory burden being brought from around the globe it should

Magazine Design The Magazine Production Company, Adur Business Centre, Little High Street, Shoreham-by-Sea, West Sussex, BN43 5EG

are turned to Asia and the events of the past year have further solidified

Printer Century View Printing Limited Units B3, B4 & A1; 10/F Ko Fai Industrial Building 7 Ko Fai Road Yau Tong Kowloon Hong Kong

be a turning point for Asia’s electronic trading industry. The world’s eyes

that. Water snakes will be in high demand as we look to the promise of the year ahead.

Advertising Enquiries support@asiaetrading.com europe@asiaetrading.com Subscription Enquiries support@asiaetrading.com europe@asiaetrading.com Scan the Quick Response Code with your iPhone or Android Phone to take you to the Subscription page

Stephen J. Edge Editor

www.asiaetrading.com z Q1 2013 z Asia Etrader

contents

Contents IN THE ZONE Our round-up of industry news and developments across Asia last quarter. Page 4

Cover Stories Asia Etrading Industry Review – 2012 was a tough year for the industry. Low volumes, regulations and evolving market structure were among the happenings last year. Page 6 Asia’s Liquidity Enigma – Asia Etrading held its third forum that gathered together leading industry participants to address the liquidity challenges in Asia. Hear what they said. Page 14

Opinion & Analysis Trading into Hong Kong close – Hongsong Chou, explains the new, and long

awaited, change to market structure at the HKEx. Page 12

DERIVATIVES New currency pairs are making Asian FX trading a hot market; Asia Etrader investigated its growth with a panel of experts. Page 22

Asia Futures Trading 2012 Recap – See how Asia’s derivatives exchanges fared in last year. Page 26 Volatility in Asia 2012 – We compare volatility profiles of various benchmarks in Asia. Page 24

BUY SIDE Getting with the program – Arid markets are leading asset managers to seek out well connected program trading desks. Page 28

RISK Taking a chance – The continuing economic and financial gloom puts strategic risk management at the top of the priority list. Page 30

EXCHANGE SPOTLIGHT TSE and OSE Merger: The Changing Face of Japan – Asia Etrading held a forum in Tokyo on the merger and what it means for Japan. Page 18

WHO’S WHO Kesara Manchusree managing director of the Thailand Futures Exchange spoke with Asia Etrader about the Thai capital markets, the ASEAN Link, exchange competition, algorithmic trading and the regulatory impact of Dodd-Frank. Page 32

ALGO SURVEY Asia Etrading Algorithm Survey 2102 – We asked the industry 50 questions on trends and consumption of algorithms in Asia. Here’s what they said. Page 46

Asia Etrader z Q1 2013 z www.asiaetrading.com

contents

EQUITIES One year on: Competition in Australia – Is Australia a hostile environment for competition? Page 36

Asia’s Fragmentation Footprint 2012 – We look back at the year gone by and measure the depth and length of Asia’s fragmentation footprint. Page 38

Asia Equity Trading 2012 Recap. Our quarterly review of turnover, average trade sizes, spread and market impact costs on Asia’s exchanges. Page 43

COUNTRY FOCUS The Philippines: Under the radar – Do the Philippine Stock Exchange’s planned reforms go far enough in providing an open market? Page 58

post trade Over the border OTC rules – Differences in national rules and extraterritorially are playing havoc with Asia’s preparations to centrally clear OTC derivatives. Page 60

OPINION POLLS Should orders have a mandatory resting period? Regulators are proposing a bandage to counter the small percentage of abusive algo traders. We ask

the industry. Page 62

Will 2013 be a better year for Asia’s electronic trading industry? Traders weigh in with their views. Page 63

WORD ON THE STEET What are your predictions for 2013? What you think could, or should, happen. Page 64

TECHNOLOGY HKEx launches Hong Kong trading ‘ecosystem’ – New data centre boasts high performance for Hong Kong, but its competitive advantage is questioned. Page 66

BACK PAGE 68 Dates – Exchange holidays and important industry events Directory – A listing of Asia’s electronic trading industry participants Social Media – News and information on the trends in Social Media of Asia’s financial industry

www.asiaetrading.com z Q1 2013 z Asia Etrader

In the zone

In the Zone... The last quarter of a year many of us will be happy to see gone; still, much to review in the last 90 days of 2012 as we look forward to a new year.

Australia ASX saw a solid last quarter of 2012, with its new trade registration facility, TradeAccept, live on 29 October; growth in its Centre Point Block execution facility as Morgan Stanley became a member and broker CIMB Securities joining its datacentre. However it faced new competition in posttrade processing; Eurex Clearing launched an incentive scheme to attract Australian and Asian firms, while LCH.Clearnet said that it would offer clearing in Australia for interest rate swaps. Chi-X Australia had a mixed few months as it passed its first annual assessment by the Australian Securities and Investments Commission (ASIC) but announced that CEO Peter Fowler was to step down from the position in early 2013. Fowler has seen the exchange through its tough set-up and launch period, establishing a market share of 7.2% trading in ASX securities within 12 months of the launch. ASIC issued new rules to tackle dark execution, market fragmentation and rogue trading technology with a combination of kill switches, extreme trading rules and additional data reporting requirements. It also bought a new market surveillance platform from First Derivatives.

Hong Kong Big deal of the quarter was HKEx taking over the LME for £1.4 billion. The opportunity to access China’s warehouses has been cited as a big plus for some London-based metals merchants, although the new owners have expressed plans for electronification that may not sit well with traditionalists. The Hong Kong Mercantile Exchange (HKMEx) responded to potential competition from the HKEx LME deal by reaching out with IPC’s Connexus Financial Extranet, which lets market participants that are hosted at the exchange to connect with other elements of the global trading community, Eric Maine was named director of business development projects, which makes him responsible for managing new product launches, from origination to market execution and delivery. Maine has a wealth of experience

as former head of product development and management for Commodities at Singapore Exchange (SGX), two years at Singapore Mercantile Exchange where he was head of product and research and a similar position at the IntercontinentalExchange (ICE). NYSE Technologies expanded its Secure Financial Transaction Infrastructure (SFTI) in Asia, with the introduction of two access centres located in Hong Kong, which offer access to Hong Kong Exchanges & Clearing (HKEx), for the first time. As part of the expansion NYSE has also extended SFTI to the new HKEx Data Centre co-location facility. Clearstream announced it would begin providing cross-border collateral management and liquidity services in Hong Kong, during Q1 2013. The Hong Kong Monetary Authority (HKMA) is supporting the service.

India India’s stock markets took a hit on 7 October with the Nifty dropping over 900 points and the BSE Sensex by almost 300 points. Nonalgorithmic orders for an erroneous quantity were to blame, according to the National Stock Exchange (NSE), which resulted in executing trades at multiple price points across the entire order book, causing the circuit filter to be triggered, freezing the market. The NSE hit a low of 4,888 intraday while the benchmark BSE Sensex fell below the 19,000-mark. MCX Stock Exchange (MCX-SX) received the go-ahead from financial markets regulator Securities and Exchange Board of India (SEBI)

to go live from December 19, 2012, in new product segments such as equity, wholesale debt and interest rate derivatives. A mocktrading session was held on 21 November to familiarise and encourage new participants with this new trading platform, as it tries to reach the critical mass of registering 350 members. It announced that it has adopted the Bloomberg Global Identifier across all MCX traded contracts on its website. MCX will display Bloomberg’s global ID protocol for all MCX traded contracts on its website. On the commodity side its Silver 1000 monthly contract, which launched on September 27, 2012, has witnessed delivery of 1010 kg silver kilo bars, with 66 per cent of the open position resulting in delivery.

The expected growth in electronic trading in India that MCX’s equity market can deliver was no doubt one factor behind Fidessa’s launch of a Mumbai office. The trading systems supplier will offer a fully-localised service to firms trading the Indian equity and derivatives markets, and enhances on-the-ground support for Fidessa’s current clients in India. Elsewhere, Shri Ashishkumar Chauhan, was announced as chief executive officer of the Bombay Stock Exchange (BSE) having been deputy CEO since 2009 and interim CEO from May 2012, and Citi became the first international custodian to offer securities lending on the NSE.

Indonesia Equinix and PT DCI began building a data centre, infrastructure and colocation services in Indonesia. PT DCI will build and operate a new data centre in Jakarta to provide local and global customers with a range of colocation,

Asia Etrader z Q1 2013 z www.asiaetrading.com

in the zone

interconnection, support and monitoring services as part of Platform Equinix. The new centre will have capacity for approximately 65,000 gross square feet and 1,250 cabinets when phase one is completed in Q1 2013.

Japan On 4 November the Tokyo Stock Exchange and Osaka Securities Exchange confirmed they would merge to become the Japan Exchange Group in 2013 (see Asia Etrader Issue 4). Rival trading venues Chi-X Japan and SBI Japannext were given exemptions by the Financial Services Agency (FSA) from the Take-Over-Bid (TOB) rule of the Financial Instruments and Exchange Act. The TOB rule requires investors who approach a 5% stake in a company’s outstanding shares to launch a tender offer if they are trading off exchange, causing many participants to have concern for inadvertently breaching the rule when trading on a PTS. The exemption will allow investors to trade on Chi-X Japan and SBI Japannext without concern for breaching the TOB rule. The FSA also extended short selling rules that require short trades to be flagged by traders, and banned short selling at prices the same as or lower than the latest market price. Nomura was hit with a fine via Japan’s Securities and Exchange Surveillance Commission after the omission of a company name from some Nomura research facilitated insider trading. Former CEO Ken Watanabe and three other senior executives had resigned earlier in the year following other insider trading scandals, which resulted in a ¥200 million fine for the bank.

Korea IT solutions provider Koscom picked two offerings from connectivity supplier IPC’s Financial Markets Network, the Connexus Financial Extranet service and the Direct Connect data service, to make its Busan facility meet the requirements of international clients. Koscom’s international clients in Korea should be able to connect with member brokers and market data, plus its derivatives engine can now be connected with directly from Tokyo. At Koscom’s Busan Data Centre, information delivery platform KVH launched its “Busan DR Pack,” a disaster recovery (DR) and backup services offering for Japanese and multinational companies.

Malaysia The country saw agency broker ITG launch its ‘POSIT’ crossing network, with a dark aggregation algorithm and the POSIT Alert

block crossing platform, for trading Malaysian equities. The addition of Malaysia has expanded the breadth of ITG’s global liquidity sourcing capabilities and will potentially increase the market’s appeal to overseas traders. Meanwhile Bursa Malaysia Derivatives’ (BMD) Crude Palm Oil Futures saw open interest hit a new high with 151,508 total contracts remaining open at the close of market on 5 December. Hitting above the 150,000 contracts mark is a new milestone for the market.

Singapore Exchange Derivatives Clearing (SGX-DC) proposed changes to clearing rules to allow members to clear over-the-counter (OTC) financial derivatives transactions for their customers. Clearing members have previously only been permitted to clear proprietary OTC transactions.

Philippines Clearstream launched a new settlement link this quarter to provide institutional investors access to Philippine securities. It offers settlement and custody services for all asset classes denominated in the Philippine Peso, including listed equities, government bonds, corporate bonds, warrants, treasury bills and depository receipts. Standard Chartered Bank, Philippines, is Clearstream’s local partner and will act as sub-custodian.

Singapore

The city-state saw a range of developments as its financial infrastructure sought to support new regulation and benchmarks. Singapore Exchange (SGX) opened a consultation on new rules and refinements to help its clearing and settlement processes become more transparent and its Central Depository (CDP) become more secure. The post-trade rule amendments cover topics such as margins and collateral being provided to the clearing house, actions to be taken to manage the default of a clearing member, and processes by which customers can have their trades settled during such an event. A new proposed margin framework will reinforce its CDP’s position as a safe, efficient and transparent venue for participants to conduct business by aligning CDP’s practices with new international standards established by the Committee on Payment and Settlement Systems (CPSS) and the International Organisation of Securities Commissions (IOSCO) for central counterparties in April 2012.

www.asiaetrading.com z Q1 2013 z Asia Etrader

The SGX announced two partnerships; the first with Eurex is an exchange whereby they will each offer market access to the other’s customers with their data centre linkage available from January 2013. Eurex members hosted in SGX’s co-location data centre can now directly connect to the Eurex access point hosted at SGX. Likewise, SGX customers in Eurex’s and Deutsche Börse’s co-location and throughout Europe can use Deutsche Börse’s. Trade matching will still be executed at the respective home exchanges. SGX completed a compression of cleared Singapore dollar interest rate swaps (IRS) held by its clearing members, in partnership with Traiana. Approximately S$25 billion notional of IRS trades were terminated during the portfolio compression exercise on 23 November 2012, which involves the elimination of trades whilst keeping the market exposure of the clearing member almost unchanged. The ASEAN Link, of which SGX is one of three operational exchanges, unveiled a new website, www.aseanexchanges.org which contains information on the project including key mile stones. Hupomone Capital Partners Singapore was reprimanded by the Monetary Authority of Singapore for late submission of data including assets under management and the total number of qualified investors on whose behalf the exempt fund manager undertakes fund management activity.

Thailand The Stock Exchange of Thailand (SET) connected with the Bursa Malaysia and SGX through the ASEAN Trading Link, offering investors access to over 2,200 listed companies with a market capitalization of around US$1.4 trillion. SET also announced that six Thai brokers are joining the ASEAN Trading Link by January 2013 for a total 15 brokers, on top of the current nine brokers which have already offered the trading via the regional connectivity since 15 October 2012.

cover story

Asia’s Electronic Trading Industry 2012 Review

nother year has come and gone which saw dramatic changes across Asia’s electronic trading industry in terms of market structure, regulation, new products and new entrants. Despite the lower volumes in both cash and derivatives, and subsiding volatility which saw trading desks contract last year, the region’s industry is stronger and better prepared for its manifest destiny at the centre of global trading. Among the most significant events that shaped last year was the Hong Kong Exchange takeover of the London Metal Exchange. Pundits argue they overpaid to gain access to an asset class they know little about playing, on the gateway to China story. Could that investment instead have been used to improve its own secondary market that despite its size is woefully behind its regional rivals and global peers? It will take years to answer that question.

The TSE and OSE merger to form the Japan Exchange Group (JPX) certainly ranks as a noteworthy event of 2012. Japan has been struggling for years not only within the capital markets but across its economy as a whole and now with the rise of China they have finally taken the first steps to get back in the game. We’ll be following this story as it plays out. Probably the last development in the exchange space would be the ASEAN Trading Link between Singapore, Malaysia and Thailand with the Philippines and Indonesia expected to come on board this year. It is an interesting development giving the bloc some clout in terms of size but also represents a precursor to a pan-regional exchange that will consolidate clearing and begin to forge the regulations needed to bolster this development.

27.48%

The notional turnover increase at the Philippine Stock Exchange

“The Bank of Japan submitted a letter on impact of the Volcker Rule.”

On the subject of regulation, the global directives coming from the west that are impacting the region should be mentioned as one of the leading developments this year. Of course, these four incidents only make up a fraction of the occurrences within Asia’s electronic trading industry.

January The first month of 2012 saw the exchanges take centre stage. The Singapore Exchange (SGX) received Commodity and Futures Trading Commission (CFTC) approval from the US for FTSE China A50 and MSCI Asia APEX 50 Futures; saw Polaris Futures from Taiwan become a member; and put forth a proposal to remove of iceberg order functionality. The Stock Exchange of Thailand (SET) announced plans to launch new trading Asia Etrader z Q1 2013 z www.asiaetrading.com

cover story

$22.81 million The cost ASIC has bourne for market supervision

rules and their clearing house added a new member. On regulations the Japan Financial Services Agency (FSA) and the Bank of Japan submitted a letter on impact of the Volcker Rule in that country, the Tokyo Stock Exchange (TSE) filed with the Japan Fair Trade Commission (FTC) for its proposed merger and SEBI said it found abnormal currency trades on one of India’s exchanges and allowed for exchange traded interest rate futures. In China Citi Orient Securities received CSRC approval to commence operations, Korea Sovereign Fund was granted permission to invest in the Chinese stock market and the HKEx signed a MoU with the China Financial Futures Exchange (CFFEX). At the alternative markets, David Mitchell joined Chi-X Australia and SBI Japannext PTS turnover reached 4.5 percent of TSE. In other news Bursa Malaysia (BMB) loosened restrictions for local derivatives traders, Green Futures joined the Hong Kong Mercantile Exchange (HKMEx) and the Osaka Securities Exchange delayed the launch of its DJIA futures contract. The Australian Securities Exchange (ASX) fined Goldman A$50,000, Tsoi Bun was convicted of price rigging in Hong Kong and Citigroup sued a Singapore hedge fund manager.

n February In February, BMB was in the headlines again launching a new derivatives clearing and settlement system and CIMB Bank in Kuala Lumpur bought RBS Asia equities and investment banking businesses. At the HKMEx they announced having surpassed 1 million contracts traded in less than one year in operation and Newedge as their latest member. From the regulators the Australian Securities and Investments Commission (ASIC) unexpectedly announced a cost recovery program to claw back the cost of taking over supervision from the ASX in the new competitive environment. These measures only affect equities business with a bias to high-frequency trading participants, a key part of newcomer Chi-X Australia’s

“The Australian Securities and Investments Commission unexpectedly announced a cost recovery program to claw back the cost of taking over supervision from the ASX.”

business. ASIC also came out with a draft for disclosure guidance for hedge funds. The HK regulator applauded the launch of the RMB Qualified Foreign Institutional Investor (RQFII) scheme which allows RMB funds who raise money in Hong Kong to invest in China. The HK SFC concluded its short position reporting rules where any trade amounting to the lesser of 0.02% or HK30 Million of issued share capital must be reported by the end of the week. In other news Joe Meyer left the HKEx to join Aflac in Japan, the Multi Commodity Exchange had its IPO in India, Daiwa Capital cut 10% of its employees in Hong Kong, KVH and Koscom announced the launch of proximity services for Korea Exchange (KRX) Derivatives Trading and 241 securities were affected by a market data issue on the TSE.

nMarch The final month of the first quarter last year saw the HKEx begin marketing its

www.asiaetrading.com z Q1 2013 z Asia Etrader

Tsuen Kwan O data centre. Having spent US$380, the investment is well past due where the exchange will move its matching engines, house members in the colocation facility and will potentially become a spring board for direct connectivity to the Shenzhen and Shanghai Stock Exchanges. A minor matching engine upgrade came with this; not until 2015 will HKEx bring in technology (supporting a closing auction) putting the exchange up to international standards. That is not all that happened in Hong Kong with the announcement of the clearing house risk management reforms which will see the bigger members in Hong Kong bear the burden of extra capital requirements to the benefit of the 400 or so smaller members at the exchange. But those same small brokers who were opposed to the shorter lunch break saw the second phase of the longer trading hours take affect reducing their coveted lunch break. In the spirit of cooperation the BRICS Exchanges of which India and Hong Kong are a part of began to cross-list benchmark equity index derivatives of each of the member bourses. However, not much volume has come from this. On the cash side Goldman Sachs launched SIGMA X in Australia and Instinet and JP Morgan entered into a reciprocal liquidity agreement in Asia. In other news the ASX had its 25th anniversary, the CFTC approved SGX’s Stoxx 50 Index future and the OSE’s Nikkei 225 VI Future product, SEBI plans to reduce the speed of

“Instinet and JP Morgan entered into a reciprocal liquidity agreement in Asia.”

cover story

15%

Inflation in Mongolia

“TOCOM earned

dairy futures surpassed 20,000 lots traded and First Derivatives delivered a real-time derivatives reporting system to the SGX.

approval from the

May

Dubai Financial Services Authority as a recognized body.”

HFT and the Korea FSC introduced a reporting system for high volume short sales.

n April Noteworthy was the launch of Cambodia Securities Exchange (CSX) whose maiden listing was the Phnom Penh Water Supply Authority. At some point it will join the ASEAN trading link. Also, the Central Bank of Myanmar agreed with the TSE to establish a securities exchange with this country too falling under ASEAN. Speaking of which, the ASEAN members formally announced the commencement date of the link for June with the SGX and BMB kicking it off and the SET joining in August. Regulators in India and Australia came out with some lofty news with the former offering guidelines on algorithmic trading and the latter on market structure reforms. SEBI wants to see penalties applied for too many cancel and replace orders, with all algo orders pushed through a broker and with the onus of risk checking placed at the exchange level. ASIC said it wants kill switches in place, extreme price movement threshold extended, minimum block sizes reviewed and best execution policy remains as it is. The HKEx censured Goldman for breaching a listing agreement and announced forthcoming Renminbi futures. And finally, the Indonesia Commodity & Derivatives Exchange (ICDX) announced it would adopt Bloomberg’s open symbology, New Zealand Exchange (NZX)

This month saw a blow to competition and choice in Asia and Singapore with the announcement that Chi-East would close its doors. This broker-to-broker dark pool was only in operation for 18 months but in the face of low volumes, the sharing of razor-thin commissions, a difficult clearing mechanism and SGX’s block trading facility that didn’t support inter-venue arbitrage Chi-East faced an uphill battle. We hope to see this alternative back in some form or another in the future. Just across the straight at Bursa Malaysia its derivatives segment launched a revamped option on its benchmark index future the FTSE Bursa Malaysia KLCI (FKLI). Unfortunately, not much traction in the way of volumes but they did announce an all-time high for volume for contracts traded with the crude palm oil derivative leading the way. A number of MoUs were signed this month: we saw the TSE and GreTai Securities Market sign one and both Deutsche Börse and NYSE Euronext put in place an MoU with CFFEX. In Australia the ASX launched an equity OTC clearing service for equity options and ASIC upgrade its market surveillance system. In Japan, Phillip Securities became a Tokyo Commodity Exchange (TOCOM) and Chi-X Japan began offering hosted risk controls.

nJune The last month of the 2nd quarter of last year brought with it the blockbuster announcement

from the HKEx that it had made a cash offer for the LME paying HK16.8 billion (US$2.2 Billion). Some market commentators have voiced concern about the wisdom of this trade and are not entirely convinced that the management succeeded in acting in the best interest of shareholders. China, without question has the volume but will the HKEx leverage its position and award returns to its shareholders or have they overpaid? Time will tell. This wasn’t the only development in Hong Kong in June. The Hong Kong regulatory commenced its short position reporting regime, the previously

“Koscom announced the launch of proximity services for Korea Exchange (KRX) Derivatives Trading.”

cited RQFII A-share ETF began trading, the CSRC approved to china listed ETFs that will invest directly in Hong Kong shares and lastly the HKEx with SSE and SZSE established a joint venture. Currency was a popular product this month with ICDX and the SET both launching futures products at their respective bourses. The Monetary Authority of Singapore

24 May

The last day of Chi-east operations Asia Etrader z Q1 2013 z www.asiaetrading.com

cover story

105,061,825 CSI300 futures contracts traded

responded to accusations that it supported regulatory arbitrage, Dubai Mercantile Exchange (DME) appointed a new CEO and SGX renewed Mr. Bocker’s contract too. Tokyo Grain Exchange (TGE) announced it would consolidate with TOCOM and the Dubai Gold & Commodities Exchange (DGCX) selected Cinnober for its trading, clearing and surveillance technology. Yuanta Futures became a Member of NYSE LIFFE and ASX will launch Centre Point Block.

July The first month of summer is supposed to be quiet by July 2012 was anything but. There were no standout events just many of them. In Japan the OSE and TSE merger was approved by that country’s prime minister. Also, Japan’s TOCOM earned approval from the Dubai Financial Services Authority as a recognized body as that exchange seeks to increase international

“HKEx TKO centre a spring board for direct connectivity to the Shenzhen and Shanghai Stock Exchanges.”

business. Reprimands were handed out to Evia Capital Partners in Singapore and SocGen and IMC in Hong Kong. Option products were put online with SGX offering NIFTY Index options and BMB launching crude palm oil options on futures. An interesting item was the London Stock Exchange (LSE) and SGX cross quotation agreement. This allows for

SGX stocks to trade on LSE and LSE stocks to trade on SGX. Could this pave the way to international interoperability? And in another cross border initiative the Taiwan regulator announced several measures regarding cross strait securities dealing. The HK SFC proposed to improve the regulatory framework around electronic trading and released the consultation conclusion on governing the OTC derivatives market. The HKMEx saw several members joining over the year with CIFCO and Phillip Commodities the most recent in July. Now if only members would start to trade. In the wake of the failed merger ASX and SGX continue to explore ways in which to work together where they announced a market access initiative with ASX having an access point at SGX and SGX at the ASX.

nAugust This month witnessed the successful tender offer of the OSE by the TSE with more than 80% of shareholders accepting paving the way for the JPX January 2013. The price valued the OSE at US$1.65 billion which some shareholders felt was too low. In the same month, however the TSE experienced a second hardware failure of the year which brought with it the wrath of the Japan FSA who issued a business improvement order to them. Also from Japan the FSA sent a letter to the US CFTC regarding its view on cross border swap regulations and SBI Japannext saw turnover reach 5.8% market share of the TSE. Regulators were not on vacation this month

“The successful tender offer of the OSE by the TSE with more than 80% of shareholders accepting paving the way for the JPX.”

with ASIC issuing a consultation on electronic trading, SEBI offering clarification on direct market access and the HK SFC fining RBC Investment Management HK4 million. In China brokerage news, Nomura acquired additional QFII quota and Citi Orient Securities officially commences operation. Thailand continues to develop its market structure where it agrees with the KRX to develop a clearing system and started to offer third-party clearing and global custodian services. In commodities, the HKMEx appointed Jane Wang and William Barkshire as co-presidents and the Singapore Mercantile Exchange (SMX) introduced a negotiated trade facility (block trading for you cash people).

n September The end of summer last year brought with it

29,634,478

www.asiaetrading.com z Q1 2013 z Asia Etrader

Trades at the Indonesia Stock Exchange

cover story

Out of the top 10 futures contracts traded by volume are in China

“The end of summer

ETFs in China. Lastly, SGX allowed Direct Market Access to its securities trading from 18 September.

last year brought with it

nOctober

the start of the ASEAN trading link.”

the start of the ASEAN trading link. Having been delayed for three months citing technology, post-trade and regulatory issues the pan-regional network began with Singapore and Malaysia forging the first connection. As we mentioned before this is a significant development for that part of the world, while mostly benefitting retail it lowers the cost of providing access for the sell-side and offers one-stop entry for the buy-side. Clearing is still a hurdle to overcome but its progressive market structure development nonetheless. The next section of the link will come from Thailand which was waiting for its matching engine upgrade that took place in September with the Cinnober platform. The HKEx reduced its reporting window from 15 minutes to 1 minute for ATSs which, while still an eternity for some trading strategies, could be a signal of improved market structure. But could it reduce anonymity and allow watchers to get ahead of the trade? Stemming from the AIJ Investment Advisors scandal the Japan FSA began its review of regulation and supervision over asset management. Also from Japan SBI Japannext went live with INET X-Stream from Nasdaq OMX replacing its NYSE Technologies matching engine. China’s cross straits ties with Taiwan continue to develop with former allowing some banks from the latter to invest in Chinese stocks and Hua An Asset Management licensed DAX to boost

The first month of the last quarter of 2012 brought with it the amendment of the Takeover Bid Rule. Here, any company purchasing 5% of a Japanese company over 60 days on a proprietary trading system (PTS) would be required to launch a formal takeover bid. The are a few other requirements to qualify for the exemption but with this policy in place it should allow the large buy-side funds to take a serious look at the PTSs. Post trade was in the news again this month with Clearstream, the subsidiary of Deutsche Borse Group adding a settlement link to the Philippines and in cooperation with the Hong Kong Monetary Authority launched cross-border collateral management service. Also, ASX and SGX both made changes to their clearing house and CCP services. Eurex, another subsidiary of Deutsche Borse Group launch a participation scheme in Asia in a bid to attract more derivatives trading to Germany. In India the NSE had a mini ‘Flash Crash” caused by several order being sent to the market, Fidessa opened an office in Mumbai and Citi started its securities lending service. Thailand went live on the ASEAN Link, MAS reprimands Hupomone Capital Partners and Equinix in partnership with domestic PT

DCI began offering collocation in Indonesia. ASX replaced its legacy Sydney Futures Exchange derivatives block trading platform SFEIN with TradeAccept.

“The CSRC approved china listed ETFs that will invest directly in Hong Kong shares.”

November The 4th of November was the day the OSE and TSE merger was consummated, paving the way for the Japan Exchange Group to start competing domestically and internationally. While much still needs to be done including the consolidation of technology; we expect to see big things from the JPX. Also in Japan Nomura Securities came under the spotlight for inadvertently providing insider information to Japan Advisory LLC. This brought with it a fine from the OSE of JPY16 million yen and a business improvement order. Australia’s new Market Integrity Rules (MIR) were published based on the consultation back in April implementing kill switches, extreme price

18 June

First day of mandatory reporting of short selling in HK Asia Etrader z Q1 2013 z www.asiaetrading.com

cover story

200 milliseconds The latency between Tokyo and New York

movements and spelling out ‘meaningful price improvement’. Additionally, Peter Fowler, the CEO of Chi-X Australia announced he would step down this year and Morgan Stanley became the seventh firm to offer DMA connectivity to ASX Centre Point Block. The BSE appointed a new CEO, Shri Ashishkumar Chauhan and also in India in preparation for its launch this year India’s MCX-SX held a mock trading session of its equity segment. Bloomberg won another endorsement of its

“A blow to competition and choice in Asia and Singapore with the announcement that Chi-East would close its doors.”

symbology with the MCX (parent of MCX-SX) using it for all their commodities contracts. Coopetition amongst heavy weight investment banks saw Citi and UBS agree to provide a post-trade solution for broker-dealers in Asia.

n December Finally, the last month of 2012 arrived with the completion of the HKEx acquiring LME. Further, in the new exchange space the MCXSX received its ‘commencement certificate’ from SEBI giving the nod for another bourse operator in India. The approval came with many bumps along the way in particular the 5% ownership rule that saw its owners contending with reducing their stake. While still difficult to access by foreigners India will

“The HKEx reduced its reporting window from 15 minutes to 1 minute for ATSs.”

undoubtedly be the place for trading in Asia. Australia was in focus again this month with the regulator selecting First Derivatives market surveillance solution and providing its first assessment of Chi-X. At the ASX CIMB, after having made its purchase of RBVS in Asia join the Australian Liquidity Centre. There was quite a bit going on in the connectivity segment too with Eurex and SGX signing a market access linkage agreement, IPC connecting the HKMEx and NYSE Technologies’ SFTI network coming to Hong Kong. In other news ITG launched POSIT in Malaysia, CQG and Phillip Futures expanded their relationship in Asia, the HKMEx appointed Eric Maine as director of business development and BNP Paribas Securities Services launched a post – trade service catering for the LSE-SGX cross trading venture.

nYear in review What a year it was. From regulations, connectivity, mergers, acquisitions, new products and new exchanges 2012 will be a year to remember for its significant change across all parts of the industry and business lines. Though it continues to be a tough market all around and with the increased burden of geography electronic trading is not as badly off as other parts of the world. We’re sure 2013 will bring with it its share of surprises, developments and growth that while continue to push Asia to the centre of the world.

www.asiaetrading.com z Q1 2013 z Asia Etrader

opinion & analysis

Trading into Hong Kong close Market Microstructure Features and Optimal Close Strategy Design Hongsong Chou and Terry Xu Charles River Advisors Limited

In October 2012, the Beijing-based China Asset Management Company (China AMC) and the Guangzhou-based E-fund launched the first two cross-border ETFs that have Hong Kong stocks as underlying instruments but are listed on Shanghai and Shen Zhen stock exchanges. The China AMC Hang Seng Index ETF is currently being traded under the ticker of 159920 on Shen Zhen Stock Exchange. The E-fund Hang Seng China Enterprises Index ETF is currently being traded under the ticker of 510900 on Shanghai Stock Exchange. As the ETFs’ net asset values (NAVs) are marked to market using the Hong Kong Stock Exchange (HKEx) official closing price for the brokers who make market for these two ETFs, capturing the close prices of the underlying stocks is a major task. These two ETFs are just one example of many reasons why Market on Close (MOC) strategies are often popular among brokers and dealers who trade into Hong Kong. Other than demand from buy-side firms such as China AMC and E-fund for close-end fund mark-to-market valuation and index rebalancing transactions, the unique nature of how HKEx determines stock closing price is another reason. Comparing to other major exchanges in the world, the closing mechanism of HKEx has gone through several changes in recent years. The exchange introduced a closing mechanism in May of 2008 that was modelled after similar mechanisms of other markets such as those of the London Stock Exchange and the Korea Stock Exchange. However, some extreme volatilities of several large cap stocks near close on several trading days after May of 2008 forced HKEx to suspend the closing auction mechanism in March of 2009 and roll back to the “median of 5 snapshots” closing price determination mechanism. The “median of 5 snapshots” closing price determination takes the median of the last 5 nominal prices in the last minute of the continuous trading session. The system will take 5 snapshots on the nominal prices at 15-second interval starting from 3:59:00 p.m. Under normal circumstances and in particular for relatively liquid stocks, the nominal price is

Figure 1: A typical intra-minute volume profile and bid-ask spread change of a Hong Kong stock in the last one minute of continuous trading

the last recorded trade price as long as this trade price is within bid-ask spread. For other cases, the nominal price has to be determined by comparing the current bid price, the current ask price and the last recorded price in accordance with Rule 101 of the Rules of the Exchange. This unique rule for closing price determination, when combined with technology aspects such as the throttle1 arrangement for message submissions and influences from other markets such as China close and Europe open near 4pm of Hong Kong local time, leads to specific market microstructure characteristics near Hong Kong close. As a result, the design and development of an effective MOC strategy require quantitative models that can capture such microstructure details and specific technology treatment that utilises throttles efficiently.

Key market microstructure features of Hong Kong close The “median of 5 snapshots” of Hong Kong closing price determination has led to concentration of liquidity around each of the

“Comparing to other major exchanges in the world, the closing mechanism of HKEx has gone through several changes in recent years.”

5 15-second snapshots, which are 3:59:00, 3:59:15, 3:59:30, 3:59:45 and 4:00:00. Figure 1 shows a typical intra-minute volume profile of a Hong Kong stock. In general, volume in the last minute spikes around the 5 15-second snapshots. Because of the throttle limit that many market participants face during the last minute trading, some orders submitted exactly

Asia Etrader z Q1 2013 z www.asiaetrading.com

opinion & analysis

“...influences from other markets such as China close and Europe open near 4pm, leads to specific market microstructure characteristics near Hong Kong close.”

at the 15-second snapshots may not get filled immediately. Instead, they may be filled in the second right after the snapshot. This is why people often see relatively large volume at 3:59:01, 3:59:16, 3:59:31 and 3:59:46. For relatively liquid stocks, volume profile can exhibit minor spikes in between two consecutive 15-second snapshots, as people often combine these “in-between” executions with 15-second volume spikes to ensure execution certainty, especially for relatively large orders. For most of the cases, intra-minute volumes tend to concentrate more on the first 3 15-second snapshots than the last 2. This is mostly due to the fact that people tend to ’front-load‘ their executions at the beginning of the last minute to ensure high fill rate and avoid under-fill risks. As a result of this, liquidity starts to dry up after 3:59:45, leading to wider bid-ask spread (see Figure 1), which further reduces people’s willingness to trade in the last 15 seconds due to elevated transaction cost.

The anatomy of a MOC algorithm for Hong Kong market a. Key strategy set-up requirements: A client asked to buy 8,000 shares of 1299 HK (AIA Group) that targets the official close price on May 16, 2012. The 8,000 shares order was less than 1% of average daily volume in 1 minute interval. The round lot size of 1299 HK was 200 shares. Given the relatively small order size, the trader adjusted the MOC strategy using two key parameters: first, the trader allowed the strategy to place the order passively in the market 3 minutes before market close; second, the trader required that the fill rate must be 100%; in order to achieve that, the trader allowed the strategy to cross the spread whenever necessary while ignoring the potential impact on the market, which was likely to be small. Based on these parameter set-up, the MOC strategy decided to divide the 8,000 share parent order to two groups: the “passive” group that consisted of just one order that was 60% of the total parent order, and the “aggressive” group that consisted of the remaining 40% of the total parent order, which was further sliced into three smaller orders of 1,600 shares, 1,200 shares and 400 shares in size, respectively. The three orders in the aggressive group would target the 3:59:15 pm, 3:59:30 pm and 3:59:45 pm snapshots, respectively. b. Step-by-step action of the MOC strategy [3:56:30 – 3:57:30 pm] The MOC strategy started to examine the price trend at 3:56:30; the sampling of past trade/quote date was finished at 3:57:30, and an analysis based on market data was done as well. The strategy’s short-term alpha signal model indicated that price was under downward pressure and might tick down in the next 1-2 minutes; [3:57:45 pm] The strategy sliced 60% of the order (in total 4,800 shares) and placed a limit order at the current bid (26.35 HKD), trading passively at first as the short-term alpha indicator showed that price might move downwards; [3:58:07 pm] 4,200 shares of the passive order was hit on the bid at 26.35 HKD, with 600 shares remaining at the top of the queue; the strategy decided to stay put as the downward price pressure was still present; [3:58:08] 200 more shares was hit on the bid at 26.35 HKD; the strategy decided to keep waiting for another hit; [3:58:10] the remaining 400 shares of the first 4,800 share child order were filled; as 60% of the order had been filled, the strategy decided to stay out of the market until the last minute trading commenced; behind this decision was that the short-term alpha signal indicated that the price might tick downwards eventually; [3:58:19] both bid and offer of the stock ticked down; still significantly ahead of schedule, the

www.asiaetrading.com z Q1 2013 z Asia Etrader

strategy calculated the potential duration of current tick and was not convinced that the current bid at 26.30 HKD might last long; [3:58:39] both bid and offer ticked up; the strategy was waiting to enter the last one minute trading to capture official close price; [3:58:52] the strategy sliced a child order of 1,600 shares as the first child order in the “aggressive” group; however, the MOC strategy instructed to place this order “passively” on the bid and wait to be hit instead of crossing the spread immediately; [3:59:00] the final minute of continuous trading started; [3:59:02] to capture the first snapshot, the strategy cancelled the 1,600 share order waiting on the bid and sent it across the spread to be filled at 26.40 HKD; [3:59:07] it was 8 seconds before the second snapshot, and the strategy sliced another child order of 1,200 shares as the second child order in the “aggressive” group; again, the MOC strategy instructed to place this order “passively” on the bid (now at 26.35 HKD) to wait to be hit instead of crossing the spread immediately; at this moment, the strategy found that the “queue size” on the bid was rather long; [3:59:18] to capture the second snapshot, the strategy cancelled the 1,200 share order waiting on the bid and sent it across the spread to be filled at 26.45 HKD; [3:59:22] to prepare itself to capture the third snapshot at 3:59:30, the MOC strategy decided to send the remaining 400 shares to the market; this is the third slice of the “aggressive” group; again, the strategy instructed to place the order on the bid side (at 26.40 HKD as of now) so as to be passive; [3:59:45] the third snapshot had passed and the fourth snapshot arrived; as the price ticked up significantly for the final child order slice, the MOC strategy decided to get aggressive to ensure 100% fill rate; [3:59:47] the strategy sent a one lot order of 200 shares first to cross the spread and got filled at 26.45 HKD; the strategy put the remaining 200 shares into reserve and hoped that the price may come down; [3:59:50] 3 seconds later, the strategy decided that the risk of under fill was so high at that moment; it immediately crossed the spread and got the remaining 200 shares filled at 26.45 HKD; as of now, all of the 8,000 shares were filled. So far, the execution VWAP of the MOC strategy reached 26.38 HKD; [4:00:00] the continuous trading finished, and the official close price of 1299 HK on that day was announced by the exchange to be 26.40 HKD. As a result, the MOC strategy beat the official close price by 7.5758 bps.

cover story 2

Asia’s Liquidity Enigma: Solving the riddle and reaping the rewards Asia Etrading’s third forum that gathered together leading industry participants to address the liquidity challenges in Asia, moderated by Stephen Edge.

Hong Kong Forum Panelists James Levy, head of dealing, Asia Pacific, HSBC Global Asset Management (HK). Emma Quinn, head of Asia Pacific Trading, AllianceBernstein Hong Kong. Josephine Kim, director, Asia Pacific Execution Sales, Bank of America Merrill Lynch

Asia Etrading: What are your clients saying are some of the challenges in sourcing liquidity in Asia? Josephine Kim: The challenges we are hearing from the buy-side in Asia; are that the region is not a homogenous entity, we’re talking about 12-13 different countries. Having one central dealing desk would have everyone working more than 13 hours a day. So I wouldn’t say that there’s one solution for Asia, it’s important for us to understand that every country is different. The language is different. Regulation is different. It is important for us to understand what each country does and how it works in each country. We hear that in many areas the buy-side have to rely on their

broker due to a lack of resources. We know that technology is a big issue that they have. But we are here to help whether clients need a quantitative study, a consultation or just a market update. James Levy: Everyone here has got a different challenge depending on their investment process. There are a number of different benchmarks currently being used in Asia and that makes it difficult to match up your order with the other side. There may be VWAP or algo orders being worked in the market and you have to look to match up with this liquidity while adhering to your own particular trading benchmark, so it can be difficult. Let’s take the LINK initiative in ASEAN where we have seen

some of the best performing markets in Asia this year – in the Philippines and Thailand, it can be difficult to find liquidity in these markets especially when you have things like limits on foreign stock ownership in Thailand. The ASEAN Trading Link has been formed to allow local investors to gain access to markets across the region. It now has three exchanges – Malaysia, Singapore and Thailand. I think it’s a pretty good initiative, however whether it will transfer into more liquidity for us as institutional investors is difficult to know, but I think these types of steps are quite positive for us and the region. But once again you’ve got to try to deliver on your own trading strategy with others. You mentioned facilitation in your introduction. I think that’s certainly an option and if you’re using electronic execution, you need to be more intelligent about the algos you’re choosing when trying to match up with liquidity you may be seeing in the market. The type of order, the size and sector are all important considerations and being a little bit more flexible will be useful in sourcing liquidity. Emma Quinn: When you’ve got different firms using different benchmarks it’s quite difficult for us so we’re trying to find different ways to

Asia Etrader z Q1 2013 z www.asiaetrading.com

Cover story 2

seek liquidity like dark pool aggregation. This then brings in a whole heap of questions: do you show yourself in the dark pools or do you use an aggregator? Do I go directly to the dark pools on a busy day when I have a lot of orders that I need to get executed? On a busy day when I have a lot of orders I don’t have the time to go through six different types of dark pools. For me personally, it’s also about keeping on top of all of the market structure issues, the differences between each market and the idiosyncrasies of each market. I think that everybody’s desks are challenged by that. AE: Is facilitation a viable solution for finding liquidity? JL: I think facilitation is a viable solution but everyone uses it differently. We like to use it for completion of orders. Whether that’s the start of an order, or the end of an order, it doesn’t really matter; completion for us is the key. Once again, you need to have a good relationship with your broker and keep the number of relationships to a minimum as trust plays a large part in making sure that you’re accessing this type of liquidity correctly. Price discovery can be difficult particularly at the moment. So, working through those problems for the size you require is quite important. I think it is viable. Aggregators can help solve some of the problems we face in terms of liquidity. But how much do you know about the type of flow you’re interacting with in those aggregators? What is the integrity of the dark venue itself? We have put a number of rules in place with those brokers who operate dark venues to try and limit the amount of signalling and information leakage. This is similar when using facilitation. Facilitation certainly plays a

role in what we do, particularly in the mid-cap space for us. EQ: In my experience, facilitation is also about understanding what facilitators are giving you and having the conviction in your price. It’s about knowing the right price for you; how much that liquidity is worth to me might be different to how much is it worth to the facilitators. All the traders that we transact against are finding it hard to price due to the lack of liquidity. Brokers are certainly not throwing around money in facilitation like they used to. I think all brokers are still offering the service; I just think it’s in a smaller dollar terms. AE: Josephine, are your customers asking for more facilitation? JK: I think we see ourselves as more of an execution services desk than as a desk that deals with one particular service like DMA or facilitation. A client wants to get a combination of different services and it will be an option for them to choose. I don’t think there will be any desk that’s going to be overtaken or replaced but there could be an aggregation of two different desks whether it’s programme trading or a facilitation desk, electronic desk or a DMA desk. I don’t think the facilitation desk is going to go away soon, it’s a part of the execution services that we do offer. AE: Would you think twice about using liquidity aggregation if the counterparty you are trading against isn’t desirable? JL: From a long-only perspective we’re very concerned about the quality of liquidity in any dark pool and have made a number of

www.asiaetrading.com z Q1 2013 z Asia Etrader

requests to our brokers with respect to dark venues. I think from an operational perspective aggregation makes sense. We certainly wouldn’t be showing our order to six brokers in the lit market, so why would we do it in the dark. We like to use aggregators to find liquidity, however it is quite opportunistic and then if we’re getting high fill rates with a particular dark venue we’ll stop using the aggregator and send it to that broker’s dark only destination. I think signalling is another issue. We know that not every market participant acts in a predatory manner, but all orders do leave that footprint in the dark, so we’re conscious of crossing the spread quite a lot in the dark. We are comfortable in crossing the spread when we use algos as it may form a part of our execution strategy in the lit market, but in the dark it is a little bit different from that perspective. On the whole there we’ve seen some very good results through the aggregators. We measure all of our broker’s performance through TCA. So in the case of aggregators, we look at the overall performance in terms of price improvement in basis points, where we’re crossing the spread and the fill rates we’re getting back from each broker’s dark venue. Specific brokers’ fill rates may vary across months and may be different from the fill rates that your broker is quoting. If you have got a few rules around dark venue participation you might be seeing lower fill rates but that’s not a bad thing by any stretch. I think the key is just to start measuring your interaction in the dark and compare what the trends are when executing in these venues. Measurement provides you with a level of visibility and enables you to choose a strategy that really suits your execution needs.

cover story 2

AE: Josephine are you typically fielding questions from your customers about the liquidity they will be interacting with? JK: Yes we are; when we sit down with clients where we used to talk about the algorithms and benchmarks that we had, we are now spending a lot more time discussing the logic that is used in terms of the crossing, the liquidity pools that are out there and crossing ratios in pools. We have a quant desk sitting here that is doing a lot of analysis on the quality of the crossings. We often get asked what our crossing ratios are and we have to educate clients that a higher crossing ratio does not equal lower costs for them. For example in Japan if you pick two stocks, say Sony and Mizuho, the crossing ratio will be more or less the same, between 28% and 30%, but when we look at the cost savings we are getting it’s about 6 basis points against 30 basis points. If you ask two of your brokers the same question, and one broker says their crossing ratio is 25% and the other says 10% that doesn’t mean 25% is better than 10%. One speaker here mentioned toxicity of dark pools, and the quality of crossing is something we are spending a lot of time discussing with clients. EQ: It’s crucial to understand the flow that you are interacting with. It’s about asking brokers the right questions, and I can find that the more questions I ask the more I have. You have to keep asking questions about flow, understand the flow that you are interacting with, understand at what price you are interacting with that flow and do your own analysis on the regression. For us, the

advantage of using a dark pool aggregator is around workflow. On a busy day a trader wants the liquidity but doesn’t have the time to put an order into six individual dark pools and deal with six sets of FIX messages. There are also the costs of settlement and administration that we face with our back office. AE: What effect is fragmentation having? EQ: Fragmentation creates a challenge for regulators in that they must keep track of all of that order flow, trading behaviour and then scrutinise that. The cost of that flows through to the end investor indirectly. JK: From the brokers’ perspective it really adds cost. The more venues there are the more smart order routers need to be connected; I don’t think that adding more venues necessarily means they will pool liquidity that was previously hidden and untapped. We see more conversations between brokers, the buy-side and regulators and that is the right direction to move in. AE: Would you like to see a greater degree of coopetition taking place between brokers so they can access one another’s liquidity pools? JK: I think there are more meetings going on and we are constantly looking at what we can do better. That’s happening in India, Hong Kong, Australia and elsewhere so we can find the best solutions with the ultimate beneficiary being the buy-side and end investors rather than just thinking about what model is most profitable to brokers.

AE: Would you like to see your brokers sharing information between other desks such as high touch program trading and electronic? EQ: I have been a little bit different on the electronic side for two reasons. Firstly, we use algorithms as a workflow tool…it’s an easy way for us to manage smaller orders. Secondly, my view is that if you have a sales trader and don’t want them to see your algorithmic orders, you probably shouldn’t be using that sales trader in the first place as you have a trust issue. Dark pools on the other hand, I would want somebody sitting in the glass box as I am not doing it to trade 5,000 shares. I want to be getting much larger and so I won’t be shy in putting more large volumes into the dark pool. I’m sitting on the fence a little bit because I’m not clear in my mind about what the right model is for that. I do know that we do have to be very conscious, especially in this environment of how much you’re taking from the street. We do understand that the models that the brokers operate are costly, and brokers do need to address whether that model is right for them. AE: Under the CSA model, you’re paying a flat fee for execution so does it matter where they’re getting the trade done? JL: For us, brokers first must satisfy our execution requirements before we consider trading with them so it’s a bit more complicated than a simple yes or no answer. For example, we trade a lot more electronically versus some of our peers and the rate we pay for electronic

Asia Etrader z Q1 2013 z www.asiaetrading.com

Cover story 2

trading is obviously a lot lower than for high touch, so we may need to vary our rate at some point to make sure that we’re paying our brokers the appropriate amount so as to receive the investment services we require from them. There are various mechanisms we can use to make sure that we are getting the coverage we want from our brokers and we need to be using those where appropriate. If a broker’s execution quality drops then we will have a conversation with them to make sure that we have the right people in the right areas. It’s a very unique sort of situation because we all have different requirements as trading desks. In general, we are liquidity seekers and aim to source liquidity at the best available price from any broker on our approved broker list. JK: An interesting phenomenon we see when we sit down with a client is that they try to negotiate to lower the commission but then struggle with the fact that they are not paying the brokers enough. It is interesting for me to hear these two kinds of complaints. So I want to throw that question to you guys; as the buy-side is becoming more cost sensitive and trying to save couple of basis points in commissions, it is also getting pressured by the PMs to add more brokers on the panels. Now, with the volume not being there and with more brokers to pay, how do you really tackle those kinds of issues? You’ve got two concerns there. JL: We may use one broker only two or three times a year because they may be able to access liquidity where our core group of executing brokers cannot. We want to give

ourselves the flexibility and option to trade with whomever we want, however we still find we are able to source most of our liquidity from our top 10 or 15 brokers. This is unlikely to change in the near term, unless a broker starts presenting us with a lot more liquidity in a particular country then we’ll have to reconsider. But typically, I like to have as many brokers on our approved broker list as possible. In reality we are not going to trade with all of them as actively as we would with say, our top 10 brokers. We have execution only rates for those brokers who are non-CSA brokers. When you make that transition to CSA from a bundled model you really need to start monitoring the performance of your brokers far more closely. Traditionally, the sell-side has given us everything for free and we’ve happily taken it, that’s been the nature of the being on the buy-side. But I think we are at a point now where we are very conscious of our brokers’ capacity to service us with limited resources. And all of us need to figure out, what level of commissions will be sufficient for us to receive the investment service we want. I think this is a new concept and it’s not an easy conversation to have with your broker. Some brokers will be very uncomfortable talking about how much their investment services cost and will instead stick to the old model. We have started having these kinds of conversations with our brokers. EQ: This is about understanding what you’re taking from the street and how much that’s costing you too, so it’s about making sure that you have those difficult conversations with each other. It’s all about the relationship.

www.asiaetrading.com z Q1 2013 z Asia Etrader

“We may use one broker only two or three times a year because they may be able to access liquidity where our core group of executing brokers cannot.”

In Partnership With

exchange spotlight

The TSE and OSE Merger: The changing face of Japan January of 2010 saw the TSE’s Arrowhead rolled out; the exchange’s technology upgrade was a catalyst for transformation in Japan. With intermarket competition from the rising Proprietary Trading Systems within its borders, as the threat of exchange mergers grows overseas, Japan is embracing growing consolidation to compete head-on locally and abroad. Under a merged OSE and TSE what will be the impact to Japan’s trading industry?

tokyo forum Panelists Kotaro Yamazawa, managing director, Osaka Securities Exchange Masami Hatakeyama co-chief executive officer, SBI Japannext Hidenori Hirabayashi, vice president, Bank of America Merrill Lynch

Asia Etrading: Why has the Osaka Securities Exchange (OSE) decided to merge with the Tokyo Stock Exchange (TSE)? Yamazawa: To give a little context, the merger process of the OSE and TSE formerly began after the integration contract was signed in November of last year, and the subsequent granting of approval by the Japan Fair Trade Commission (JFTC). On 29 October, we publicised the agenda for the extraordinary

general meeting of shareholders, which will be held on 20 November. After this meeting, we will basically be all set to start operations as the Japan Exchange Group from the 1 January, 2012. To answer the question, although there were many related factors for integration, I believe there were three which contributed most to our decision to merge with the TSE. The first is cost synergy. Now we have all agreed it is inevitable that the exchange businesses will deploy automated systems, it was necessary

to pursue cost synergies by integrating the systems between the exchanges. Currently, depreciation cost and running cost of the TSE and OSE is about ¥30 billion per year - ¥20 billion for TSE and ¥10 billion for OSE. After integration, we expect to achieve cost synergies which will reduce those expenses by ¥7 billion on a pre-tax basis. But this number is for public release and thus, a very conservative estimate. Theoretically speaking,, the cost reduction could be as much as ¥15 billion. Secondly, we expect many synergies on the revenue side as well as on the cost side. One of the largest benefits that integration will give us is the ability to deliver a variety of products on the same platform, and we believe the convenience of trading various types of assets from one platform will encourage investors to trade more actively. Also, integration of clearing houses will increase revenue from transaction fees. Especially in derivative transactions, integration of post-trade institutions will allow more efficient investment activities.

Asia Etrader z Q1 2013 z www.asiaetrading.com

exchange spotlight

A good example is the integration of clearing between the US exchanges CME and CBOT in 2007, which enabled clearing of SP 500 and Dow Futures on the same settlement platform. I understand that this integration increased the total trading volume by about 30%, and I think we will see a similar effect on transaction volume of TOPIX and Nikkei 225 futures. Lastly, the exchange business, like many other businesses, is an industry where economy of scale and economy of scope deliver significant returns, and size is very important. As you probably know, the OSE’s stock price has been stagnant at around ¥310,000 - ¥320,000 recently while its tender offer bid (TOB) price was ¥480,000, this is partially due to market speculation that securities companies will sell their shares early next year from “overhang”. OSE’s current market cap is somewhere between ¥170-180 billion, which is substantially smaller than other global exchanges such as SGX, which has a market cap of approximately ¥500 billion. So it is necessary to pursue growth to use the scale and scope of our economy to compete with other global exchanges, another major factor for the merger.

of stocks filled have also increased to about 1000 stocks per day. Also in terms of volume ratio to TSE volume, it’s increased by 0.5% on average, from around 4.5% in October to 5% in November. So although it’s not very dramatic, we are certainly seeing positive changes, and expect that more of the buy-side will participate in PTS by applying smart order routing (SOR) and algorithms, which will result in increased liquidity for the entire market.

AE: Will the TOB rule change make a difference to buy-side adoption of alternatives?

Yamazawa: I believe regulation and tax are the two most important factors that will allow the Japanese market to improve. I’m sure everyone has their own opinion about how regulation should be changed, but here I’d like to speak from the exchange’s stand point. Regulation-wise, merging of TSE and OSE is a very big step, especially for the Japan Fair Trade Commission (JFTC), because integration of those two exchanges implies that there will be a virtual monopoly of nearly 100% of domestic cash trading, derivatives trading, and listing. After the merger of Deutsche Börse Group

Hatakeyama: Since it’s been only about ten business days from the adoption of the new TOB rules, we have not seen a dramatic change yet. However, there are some notable indicators for change, which are likely due to the new rule. One of changes is that the number of ticker symbols which show bid and ask substantially increased, meaning the books are ‘deeper’ than before. Proportionately, variation

Hirabayashi: From a broker’s view point, with this TOB rule change, I feel that buy orders and sell orders are finally ready to go out to the wider market. With regard to SOR, we expect to see increased symbols in our dark pool as well as in the PTS market. So I strongly believe this synergy effect will have a large positive impact on market. According to the report we run, a day after deregulation of the 5% TOB rule came into effect, trading volume has slightly increased. AE: What needs to be done for the buy-side to consider using PTSs?

www.asiaetrading.com z Q1 2013 z Asia Etrader

and NYSE Euronext was rejected, the fact that JFTC approved this integration is evidence that the regulatory framework has been changing in Japan. In my opinion, the largest topic of regulation in Japan is the comprehensive exchange. Now that TSE and OSE are merging and comprise nearly 100% share of market, and we will no longer be domestic competitors, our next step is to improve our global presence. Our competitors are global exchanges such as CME in Chicago and SGX in Singapore, which provides a full line of products, such as securities, interest rate, foreign exchange, commodities, all on the same platform. In this environment, the buy-side is able to invest in portfolios with more variety of assets easily, at lower cost, without exposing themselves to legging risk. In order for Japan Exchange Group (JPX) to compete with those exchanges, it is extremely important to plan how to create this comprehensive exchange and put the plan into practice. The Amendment of Financial Instruments and Exchange Act (FIEA), which legally allows the comprehensive exchange to be established, is a significant step towards the realisation of the comprehensive exchange. So what really matters now is actually the willingness to do it. Some media point out that the Ministry of Economy, the Trade and Industry (METI) and the Ministry of Agriculture, Forestry and Fisheries (MAFF) have concerns about concentration of regulatory authorities in the FSA as a result of the establishment of the comprehensive exchange. But given that Japanese market is in the grip of losing out to global competition, I think there is no room for such minor disagreements

exchange spotlight

– they should stop the turf war as soon as possible and abandon their differences for the common good, in order for the Japanese financial industry to revive and prepare for global competition. Beside the issue mentioned, there are many other challenges left to discuss, such as the loosening of J-SOX regulation and poor usability of remote membership, but I’d like to stop here for now. Hatakeyama: One major regulatory hurdle for proprietary trading system (PTS) trading is the prohibition of margin trades. Today, margin trades make up 60% of trade by individual investors. While overall trading volume is declining, I think it’s very important to allow margin trades in PTS as well. Also, PTS trading is currently limited to 10% of total security shares, and revision of this regulation will encourage investors to more actively trade, and it will not only benefit the PTS market but also exchange market. I would also like to point out that action taken by regulatory agencies tends to fall behind. I hope they will have more spirit to deliver more initiatives and start something new to revitalise the Japanese market. On the other hand, I believe this integration is a turning point and signals that regulators will allow or encourage PTSs to compete more actively with the exchange, and this competition will provide market participants with a better trading environment, such as new trading opportunities and lower transaction costs. Hirabayashi: From the viewpoint of the securities broker or sell-side, I’d like to make some comments focusing on execution. In

today’s market where liquidity is fragmented and trading speed is accelerated, we need to reconsider and redefine what ‘best execution’ is, including OTC trading. From a global view point, I also think that Japan’s regulation against short selling is a little too much, and easing this regulation will increase the liquidity of the entire market. AE: How will the comprehensive exchange compete on a global level? Yamazawa: This is actually a very hard question to answer because the comprehensive exchange does not exist yet... The comprehensive exchange is about integration of the fragmented regulatory framework, especially in the derivatives market. Japan’s derivatives market size is very small for its economy’s size which is the second or the third largest in the world. According to the World Federation of Exchanges (WFE) or FIA’s statistics, its volume ranking is 14th or 15th in the world, and that is very low in proportion to its actually size of economy or the size of cash market. Although the cash market which provides funding for equity issuance takes the most important role as a primary market, it needs the secondary market to function well, and in order for the secondary market to work efficiently, the derivatives market also takes a very important role too. Unlike products in the cash market, which are largely controlled by actual economic size or activities, derivatives have a lot of potential to be expanded, depending on the exchange’s creativity and innovation. So we will focus our strategy on the derivatives market. At the same time, as a part of our strategy

for Asia, we’d give high priority to expand our central counterparty (CCP) clearing service. We are especially putting effort into OTC clearing. While the credit default swap (CDS) balance is not growing, the recent daily increase of interest rate swaps (IRS) has already exceeded ¥1 trillion and is rapidly headed toward ¥2 trillion. We hope to be the ‘Asian standard’ in this part of business. In summary, the core strategy of Japan Exchange Group will be focus on derivatives and its CCP, and to carry on this strategy, it is extremely important to create a framework for a comprehensive exchange which can provide derivatives, interest rate and forex, as well as existing financial products in one place. AE: I know Tokyo Commodity Exchange (TOCOM) is sharing technology with OSE. Can you provide some colour on how you see TOCOM fitting in? Yamazawa: This is also hard to answer because there are some politics involved. But yes, as Steve pointed out, our J-GATE system is a customised version of NASDAQ OMX’s system called Click XT, and TOCOM also uses the same system. Four years ago, TOCOM and OSE signed a memorandum of understanding (MOU) and agreed to list exchange traded funds (ETFs) linked to TOCOM’s commodities, to work together on the systems side, and to share the back-up centre. While we are planning to expand our business to commodities, OSE has little know-how about it. Unlike securities, commodities require a lot of knowledge of delivery procedure and relation between physical product and market. I believe the cooperation with TOCOM based

Asia Etrader z Q1 2013 z www.asiaetrading.com

exchange spotlight

on the MOU is most realistic way to advance our knowledge. However, since both parties are private companies, it is very important to convince the shareholders about the benefits which this cooperation will bring. At the same time, we need to have approval from authorities on both sides and to hold further discussions about the details of cooperation. AE: What is your view on the exchange competition going on in Japan and around the world? Hatakeyama: It’s hard for me to comment about exchanges, although I have views on the subject. As Yamazawa-San pointed earlier, the exchange business is a process industry today. In fact, no business can be conducted without automation, and the exchange business is no exception. They all focus on how to deploy an efficient system, using the latest technology, at the lowest cost, in order to provide investors with a better environment to trade comfortably. Looking around the world, international integration of business generally is very common today. The same is true for the exchange business – although they did not succeed, the attempted integration between Deutsche Börse Group and NYSE Euronext, and Singapore Exchange and Australian Securities Exchange are examples. So there is nothing wrong with exchanges merging internationally. On the other hand, however, it is also true that an exchange is a capital market which functions as a key business to support various industries of the entire nation. And in this sense, I hope Japan’s exchange will be more powerful and competitive in the world.

So competition between proprietary trading systems (PTSs) and exchanges does not necessarily mean scrambling for share of the existing pie. Rather, an increase in the exchange’s international competitiveness will benefit the entire market of Japan, which includes PTSs, since it will attract investors from foreign countries such as Singapore and Hong Kong. So in this sense, we’d like to cooperate with the exchange rather than compete. AE: What will the electronic trading industry in Japan look like in five years? Hirabayashi: Given the accelerating advances in technology today, in five years from now I could be placing or cancelling orders while talking as a panellist at an event like this. To be realistic, I think fragmentation and speed will advance even further. And as a securities firm, we need to constantly keep up with capital investment so that we can provide secure and fair execution of customer’s orders. Also, as the execution process gets faster, diversified, and complicated, there will be ever more invisible parts in the execution process. So I believe it is our responsibility to provide transparency of execution process to our customers by analysing the quality of execution. Hatakeyama: As I look back over the last five years, there have been many dramatic changes especially in technologies, such as the Internet and smart phones, which enabled us to do what we couldn’t. And as Mr. Hirabayashi previously mentioned earlier, we may be able to execute orders while walking, or cancelling orders just by thinking. I believe as long as we have desire to do something new, we will keep delivering change.

www.asiaetrading.com z Q1 2013 z Asia Etrader

Yamazawa: My crystal ball doesn’t show the future clearly but I can say two things, from both macro and micro perspectives. From the macro perspective, the past five years was about competition for speed and latency. However, I don’t think our competition will move from millisecond to microsecond, or even to nanosecond in five years. As a participant at some international conferences recently and observing other participant’s’ interests, I feel that we are at a big turning point where key terminology for electronic trading is shifting from “execution speed” or “latency” to something else, such as “cost”, “functionality”, “kill switch”, and “pre-trade risk control”. At a micro level, there has been more and more disparity in the response capabilities to systems by sectors, and it is one of obstacles for revitalisation of the Japanese market. More specifically speaking, for example, a market where only ultra-high-frequency quant traders participate will lose its attractiveness to many other traders because of lack of diversified order flow. In order for a market to operate its market’s price discovery function, there needs to be various types of investors, such as those who take arbitrage positions. And I hope those individual traders – called ‘click traders’ – will keep up with the market where those ultraquant traders trade by using systematic algorithm trading.

In Partnership With

derivatives

Pairing off New currency pairs are making Asian FX trading a hot market; Asia Etrader investigated its growth with a panel of experts.

Panelists Eleanor Stanley, regional product manager for Asia, Oceania and Japan, EBS Sunichi Yamashita, director of market development, Tokyo Financial Exchange Gen Utsumi, head of sales APAC, SmartTrade technologies Ian Williams, head of electronic markets, fixed income, BNP Paribas Securities, Japan

n 25 September Asia Etrader held a virtual roundtable on the future of Asia as an FX Hub. The relaxation of currency controls across the BRIC countries is leading to growing interest in offshore renminbi (CNH) currency pairs, while new derivatives contracts and increased electronification of the market offer further drivers for growth in trading volumes. Eleanor Stanley, regional product manager for Asia, Oceania and Japan at EBS the FX platform for interdealer broker ICAP was first asked where opportunities exist in the FX space in Asia. “CNH is a key focus for us and it accounts for 1% of FX turnover on a par with the Indian Rupee and the Russian Rouble, and it’s the

17th most traded currency in the world,” she said. “Business in renminbi is concentrated in Asia Pacific, primarily in Hong Kong, although on EBS it is traded around the clock – we have liquidity and numerous deals are taking place in London and US time zones. With the support of the Hong Kong Monetary Authority we facilitated the first electronic CNH trade on 27 September 2010 and since then CNH liquidity on EBS has continued to increase.” The platform experienced a record month for CNH trading in June 2012, with increased interest in CNH crosses such as Australian dollar, Euro, Yen and the Hong Kong dollar. “We have nine other crosses beyond dollar/ CNH so that is our focus,” she said. “The

second area of focus in the electronic space is electronic non-deliverable forward (e-NDF) trading. We pioneered electronic NDF trading back in February 2008 when we introduced the first electronically traded NDF, since then we’ve launched in LatAm and non-deliverable FX swaps in June 2011, we now have a range of LatAm/India and we are the first system to have electronically streamed prices.“ The Japanese retail market for FX is the most advanced retail FX market in the world. FX margin contracts have proven a success for the Tokyo Financial Exchange (TFX) however Sunichi Yamashita, director of market development, at TFX said the market had moved into a “fluctuation mode”, citing data

Asia Etrader z Q1 2013 z www.asiaetrading.com

derivatives

from the Financial Futures Association of Japan (FFAJ) that indicates Q1 monthly volume of FX contracts is between ¥100 trillion to ¥180 trillion. “There are several complex reasons for this,” said Yamashita-san. “One is the market conditions; dollar/yen was traded at a high range, between 65-70 and 75-80 for a long time. The second reason is the leverage ratio of FX margin trading in Japan which was lowered twice, first to 50x and last year again to 25x. A third point is that because of the global economic slowdown. Not only in Japanese Yen but also in the US and the Eurozone, rates are at almost zero, so the retail investor cannot make money from swap points, although I don’t think expect this situation will continue for too long.” He speculated that there is still room for expansion in the retail market as Japanese households currently hold their money much more conservatively than foreign households, while the number of retail FX accounts is still much smaller in number than the number for securities houses. “OTC brokers in Japan are quoting spreads in the 0.3 - 0.4 range,” he added. “They are crazy tight spreads, much better spreads than in the interbank market. At the same time TFX will also provide exchange rates to three decimal points from 1 October to compete with OTC FX products. I expect to see more interest in our products from this point.” Ian Williams, head of electronic markets, fixed income, BNP Paribas Securities, Japan conceded the Japanese retail market is the most mature in the world and added that he expects the retail broker community to consolidate as firms try to gain market share. “The smaller companies will disappear and the larger companies will get bigger,” he said. “At some point the retail market in the rest of the world will follow Japan’s model of retail market. Much like Eleanor we are seeing more demand for LatAm currencies and for Asian currencies. We get a lot of demand for Yen against currencies so we are developing our own price matrixes on our own platforms to cater for the end-dated currencies.” The participants agreed that one of the most exciting potential currency pairs in the region is yen/renminbi which started trading last June. Although trading volume has not been particularly high the market is expected to expand gradually with its potential based on the large volume of trade that takes place between Japan and China. Strict regulations are still applied to RMB, for example different interest and exchange rates are applied to onshore RMB and CNH. “The movement is towards greater regulation,” said Yamashita-san. “TFX listed RMB/yen margin contracts from August 2011. The average daily

“We have seen a huge increase in aggregation in the FX space in the last few years and a huge amount of internalisation of flow from the bank side.”

volume is around 5000 which is not so high, but the main reason is that volatility is not so high, because movement between the yen/RMB are not so large. However I expect the RMB/Yen direct market which opened last June to impact our RMB/Yen margin FX contracts.” Expansion and fragmentation of the market creates a greater challenge for liquidity aggregators such as SmartTrade. The overthe-counter market creates means that each liquidity provider is free to establish their pricing their own way and that makes for a more systematic challenge to aggregate information than is the case with equities. However sell-side consolidation is assisting with the challenge says Gen Utsumi, head of sales APAC, SmartTrade Technologies. “Following a spate of recent mergers between banks and brokers there are more technology experts available in the market to help trading firms build aggregation platforms,” he said. “For those who cannot afford to hire for full-time internal IT posts, vendors are hiring ex-tier 1 bank employees not only to build platforms but also to tweak customer systems to improve performance in the light of increased trading volumes.” Stanley added that latency is a key concern for some customers, however for a number aggregation management still tends to be run out of EU and the US which clearly are not latency sensitive. “From our side we have to coordinate that from a reporting and communications perspective,” she says. “We have seen a huge increase in aggregation in the FX space in the last few years and a huge amount of internalisation of flow from the bank side which is a challenge for us. In Asia, particularly recently, more and more customers are setting up aggregation systems following the trend of Europe and the States.”

www.asiaetrading.com z Q1 2013 z Asia Etrader

Nevertheless high-frequency trading (HFT) has become part of the market fabric in the OTC spot FX market and on buy-side algorithmic trading has been permitted on EBS since July 2005 meaning latency is still a significant concern for some participants. Concern over the malevolent trading strategies makes market supervision crucial for platforms like EBS. “EBS dealing rules apply to all participants on the system so we are focused on their behaviour rather than the type of entity that they are,” says Stanley. “From the market’s perspective we’ve seen some of the effects of HFT in that average trade sizes have decreased while spreads have tightened and improved. There is added liquidity and some of these algo shops provide very good streaming rates for our new markets so they do have some positive qualities. We have seen no evidence that the HFT firms desert the market when it becomes volatile. Because they do not have the emotional element some trade more strategically than human traders who would pull out of the market when faced with uncertainty.” Nevertheless the need for increased supervision is recognised in some areas of the market. Retail markets need protection in two areas said Utsumi. “Firstly around margin protection because people are losing money so quickly,” he said. “In Japan the margin leverage ratio is being tightened as in Singapore and China. Korea is also requesting people put more money into the margin. There is also a transparency issue on the retail side. In US the NFA has investigations into brokers for any sign that their system is taking advantage of customer trades. There is similar rumour in Japan that FX money broker implemented systems are artificially causing momentary spikes and drops to get customer accounts to make margin calls. The rumours are longstanding but regulators are just starting to look into these now.” BNP Paribas’s Williams added that such platforms would become more important as electronification of the market increased, in part due to the effects of regulation such as DoddFrank, which is moving trading away from the OTC model and enabling exchanges to successfully launch FX margin contracts. That will drive investment in the most reluctant markets he added, “The whole world will go electronic and Japan will have to follow suit at some point, but at the moment it’s only foreign banks that offer anything of substance in the country when it comes to trading platforms. Japanese companies are falling well behind and they don’t invest enough in infrastructure. About 61% of FX trades globally are traded electronically right now.”

volatility

Asia Etrader z Q1 2013 z www.asiaetrading.com

volatility

www.asiaetrading.com z Q1 2013 z Asia Etrader

derivatives

Product

2012 Vol

2011 Vol

Difference Type

Dalian Commodity Exchange

Soy Meal

651,753,306

99,667,228

552,086,078

National Stock Exchange of India

US Dollar/Indian Rupee

620,215,043

694,909,157

-74,694,114 Currency

Agriculture

MCX-SX

US Dollar/ Indian Rupee

551,326,121

807,559,846

-256,233,725 Currency

Shanghai Futures Exchange

Steel Rebar

361,124,960

150,068,254

211,056,706

Metal

Zhengzhou Commodity Exchange

White Sugar

296,580,380

256,419,936

40,160,444

Commodity

Zhengzhou Commodity Exchange

Pure Terephthalic Acid (PTA)

242,527,826

241,093,026

1,434,800

Commodity

Shanghai Futures Exchange

Rubber

150,352,532 191,353,172 -41,000,640 Commodity

Dalian Commodity Exchange

Linear Low Density Polyethylene (LLDPE) 143,743,074

189,120,162

-45,377,088 Commodity

Dalian Commodity Exchange

Soy Oil

137,717,108

115,620,468

22,096,640

Shanghai Futures Exchange

Copper

114,569,670 84,866,632

29,703,038 Metal

Dalian Commodity Exchange

No. 1 Soybeans

90,950,850

50,203,230

40,747,620

Agriculture

Dalian Commodity Exchange

Palm Oil

86,620,026

45,022,762

41,597,264

Agriculture

Dalian Commodity Exchange

Corn

75,648,712 53,426,642 22,222,070 Agriculture

Dalian Commodity Exchange

Coke

65,831,770 3,025,468

62,806,302 Commodity

Multi Commodity Exchange

Crude Oil

57,790,229

54,753,658

3,036,571

Energy

Zhengzhou Commodity Exchange

Strong Gluten Wheat

51,592,850

15,823,408

35,769,442

Agriculture

Multi Commodity Exchange

Silver Micro

51,441,996

46,865,399

4,576,597

Metal

Korea Exchange

US Dollar

45,853,040

62,346,155

-16,493,115 Currency

Australian Securities Exchange

3 Year Treasury Bond

44,003,411

41,662,349

2,341,062

Shanghai Futures Exchange

Silver

42,529,908 0

42,529,908 Metal

Shanghai Futures Exchange

Zinc Futures

42,201,848

101,172,348

-58,970,500 Metal

Zhengzhou Commodity Exchange

Cotton No. 1

42,067,292

278,093,248

-236,025,956 Commodity

Multi Commodity Exchange

Silver Mini

36,266,593

46,804,307

-10,537,714 Metal

Multi Commodity Exchange

Gold Petal

36,004,247

31,086,737

4,917,510

Multi Commodity Exchange

Copper

32,520,309 34,011,335 -1,491,026 Metal

Zhengzhou Commodity Exchange

Flat Glass

32,273,840

Commodity

Multi Commodity Exchange

Natural Gas

27,886,670

9,882,119

18,004,551

Energy

Multi Commodity Exchange

Gold Mini

22,213,409

26,200,538

-3,987,129 Metal

Australian Securities Exchange

90 Day Bank Bills

21,382,203

22,391,055

-1,008,852

Interest Rate

Australian Securities Exchange

10 Year Bond

18,469,473

15,954,349

2,515,124

Interest Rate

Multi Commodity Exchange

Copper Mini

18,214,742

443,149

17,771,593

Metal

Multi Commodity Exchange

Silver

17,284,529 24,434,544 -7,150,015 Metal

Tokyo Financial Exchange

Euro/ Japanese Yen

16,927,476

26,783,981

-9,856,505 Currency

Tokyo Financial Exchange

Australian Dollar/ Japanese Yen

16,500,368

41,562,640

-25,062,272 Currency

Multi Commodity Exchange

Nickel

15,414,792 15,126,553 288,239

Dalian Commodity Exchange

Polyvinyl Chloride (PVC)

13,800,306

18,827,522

-5,027,216 Commodity

Zhengzhou Commodity Exchange

Rapeseed Oil

12,510,796

8,655,930

3,854,866

Shanghai Futures Exchange

Gold

11,833,490 12,798,548 -965,058 Metal

Tokyo Commodity Exchange

Gold

11,895,357 16,075,145 -4,179,788 Metal

Multi Commodity Exchange

Gold

10,287,609 12,655,760 -2,368,151 Metal

Tokyo Financial Exchange

US Dollar/ Japanese Yen

9,212,876

31,443,262

-22,230,386 Currency

Multi Commodity Exchange

Nickel Mini

9,055,305

14,612

9,040,693

Metal

Tokyo Stock Exchange

10 Year JGB

8,865,284

6,872,320

1,992,964

Interest Rate

National Commodity & Derivatives Exchange Ref Soya Oil

8,477,569

5,973,419

2,504,150

Agriculture

Shanghai Futures Exchange

Aluminum

7,885,360 19,126,848 -11,241,488 Metal

Zhengzhou Commodity Exchange

Early Rice

7,677,210

Zhengzhou Commodity Exchange

Methanol

7,594,824 632,214

6,962,610

Bursa Malaysia

Crude Plam Oil

7,460,107

1,588,975

National Commodity & Derivatives Exchange Soyabean

7,098,382

United Stock Exchange

7,096,522

US Dollar/ Indian Rupee

Total

11,854,832 5871132 340,576,642

Source: Exchange Websites

TOP 50 Futures Contracts by Volume in Asia for 2012

* Estimated

Exchange

Agriculture

Interest Rate

Metal

-4,177,622 Agriculture Agriculture Agriculture

-333,480,120 Currency

4,418,551,600 4,369,132,041 49,419,559

Asia Etrader z Q1 2013 z www.asiaetrading.com

derivatives

Index

Volume 2012

Osaka Securities Exchange China Financial Futures Exchange National Stock Exchange India Korea Exchange TAIFEX TAIFEX Hong Kong Exchanges Osaka Securities Exchange Hong Kong Exchanges Tokyo Stock Exchange Australian Exchange BSE Thailand Futures Exchange Bursa Malaysia

Nikkei 225 mini CSI300 S&P Nifty KOSPI 200 TAIEX mini-TAIEX HSI Nikkei 225 HHI TOPIX SPI 200 SENSEX 30 SET 50 KLCI

130,443,680 117,905,210 12,538,470 105,061,825 50,411,860 54,649,965 80,061,861 123144880 -43,083,019 61,269,882 86,121,231 -24,851,349 49,284,764 61,223,864 -11,939,100 31,961,020 38,257,604 -6,296,584 20,353,069 23,085,833 -2,732,764 19,523,347 19,294,064 229,283 15,923,813 15,003,870 919,943 15,192,439 14,608,165 584,274 10,025,717 12,130,237 -2,104,520 8,907,335 2,467,221 6,440,114 4,034,460 4,316,437 -281,977 2,482,314 2,132,340 349,974

Total region

554,525,526

Volume 2011

570,102,816

Net

-15,577,290

Exchange

Product Net

United Stock Exchange MCX-SX Zhengzhou Commodity Exchange National Stock Exchange of India Shanghai Futures Exchange

US Dollar/ Indian Rupee US Dollar/ Indian Rupee Cotton No. 1 US Dollar/Indian Rupee Zinc Futures

Exchange

Top 5 Gainers Product Net

Soy Meal 552,086,078 Steel Rebar 211,056,706 Coke 62,806,302 Palm Oil 41,597,264 No. 1 Soybeans 40,747,620

Dalian Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange

Top 5 Decliners -333,480,120 -256,233,725 -236,025,956 -74,694,114 -58,970,500

Exchange

Product Volume

Soy Meal 552,086,078 No. 1 Soybeans 40,747,620 Palm Oil 41,597,264 Corn 22,222,070 Strong Gluten Wheat 35,769,442

Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange

Top 5 Agriculture Futures

Total

692,422,474

Exchange

Product Volume

White Sugar 296,580,380 Pure Terephthalic Acid (PTA) 242,527,826 Rubber 150,352,532 Linear Low Density Polyethylene (LLDPE) 143,743,074 Coke 65,831,770

Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange Dalian Commodity Exchange

Top 5 Commodity Futures

Total

899,035,582

Exchange

Product Volume

Top 5 Currency Futures

National Stock Exchange of India MCX-SX Korea Exchange Tokyo Financial Exchange Tokyo Financial Exchange

US Dollar/Indian Rupee US Dollar/ Indian Rupee US Dollar Euro/ Japanese Yen Australian Dollar/ Japanese Yen

Total

620,215,043 551,326,121 45,853,040 16,927,476 16,500,368 1,250,822,048

Exchange

Product Volume

Steel Rebar 361,124,960 Copper 114,569,670 Silver Micro 51,441,996 Silver 42,529,908 Zinc Futures 42,201,848

Shanghai Futures Exchange Shanghai Futures Exchange Multi Commodity Exchange Shanghai Futures Exchange Shanghai Futures Exchange

Top 5 Metal Futures

Total

611,868,382

Source: Exchange Websites

Stock Index Futures

* Estimated

Exchange

buy-side

Getting with the program Arid markets are leading asset managers to seek out well connected program trading desks, writes Dan Barnes.

rogram trading desks are reporting a growth of interest in their services as firms try to lower cost of accessing growth markets. Getting in and out of cash equity positions is challenging in the present environment. Globally, trading volumes across cash equities are down considerably, increasing the market impact of any trades. A search for better returns is increasingly pushing fund managers to look at emerging markets which markets are typically far less accessible than developed countries. While algorithmic trading provides buy-side traders with a cost-effective method of routing low-touch orders, program trading desks are seen as adding value. As more money is put into passive funds the level of activity going on in index events has increased; in addition, changes in the portfolio strategy are demanding large scale index rebalances which need program trading desks. “Index events are getting bigger as we see growth in passive-money and there is a combination of providing agency execution and facilitation by program trading desks.” says Khaleel Mohideen, managing director and head of Program Trading, Asia Pacific at Credit Suisse. “We’ve seen a growth in exchange traded funds (ETFs) assets under management (AUM) and since 2008 there has been a big shift of interest in emerging markets and US, European and Asian listed products with an Asian underlying.” Michael Jackett-Simpson, head of Asia Pacific Transition Management at Citi says that business has still not recovered to pre-crisis levels but it is still on the rise. “We are still see the market growing, albeit off the high rates of growth from five years ago,” he says. “The volatility in the markets has been a factor in the slowing growth rate. Notwithstanding we are still seeing regional funds making asset allocation shifts across their portfolios.” “The global asset allocation shifts and the multi-market transactions require the use of a program trading desk. These transactions need local execution expertise,” adds Mohideen.

“They require managing cash levels, being sector and country neutral, while managing FX exposures across the globe.” One of the biggest transitions this year took place when, to reduce its long term costs, Vanguard Asset Management moved index providers from MSCI to FTSE on 1 October 2012 for six international stock index funds including the US$67 billion Vanguard Emerging Markets Stock Index Fund (EMSIF). That led to a major rebalancing of its emerging market portfolio. The EMSIF fund and its ETF Shares, which Vanguard claimed to be the world’s largest emerging markets ETF as of 31 July 2012, will move from the MSCI Emerging Markets Index to the FTSE Emerging Index. The two indexes are both free-float weighted and are generally comparable, however MSCI includes China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand in its index where the FTSE Emerging Index primary emerging markets are Malaysia and Taiwan, and secondary are China, India, Indonesia, Pakistan, Philippines, and Thailand. “We believe that both index providers give investors a good approach to the market, but there is a different approach for FTSE when it comes to the country of Korea,” said Rodney Comegys in the Equity Investment Group at The Vanguard Group. “FTSE calls it developed and MSCI calls it emerging. We were more comfortable with FTSE’s view. We had to deal with the practical aspects of moving a US$67 billion dollar portfolio from one index provider to another, in this case Korea was a big trade, we’re about 15% of that market, in the neighbourhood of US$10 billion. That was moved out of Korea and redeployed into the other emerging markets.” To shift such a large block across markets will have a significant impact on the countries in question, but also poses a major challenge for the asset managers as it seeks to minimise the market impact of its trades. “Rather than moving it in one big block we are moving it in 25 steps, 4% per week coming out of Korea and into the other markets,” he says.

“Index events are getting bigger as we see growth in passivemoney and there is a combination of providing agency execution and facilitation by program trading desks,” – Khaleel Mohideen, head of Program Trading, Asia Pacific Credit Suisse

“That is the best way to minimise the cost to the investor. There will always be some cost and impact. Pakistan is also on the FTSE Index but not the MSCI Index, however its stocks are an extremely small component and [the transition] probably will make very limited difference to the investor.” Further growth has been seen with Asianbased accounts investing abroad. Credit Suisse reports this as common in Japan for over 10 years and in non-Japan Asia from 2006 but notes the business really kicked off in 2008 and later. Typically these services are sought out by investors that have been very sophisticated in domestic markets but want to diversify their portfolios and invest internationally as part of that.

Asia Etrader z Q1 2013 z www.asiaetrading.com

buy-side

“We had to deal with the practical aspects of moving a US$67 billion dollar portfolio from one index provider to another” Rodney Comegys, The Vanguard Group

Khaleel Mohideen

Rodney Comegys

managing director and head of Program Trading

head of index analysis and ETF trading

Asia Pacific at Credit Suisse

Often the quickest and most cost effective way to invest is via passive investment, via an ETF or other index-based product. As that growth has been happening they need local desks in the region who can provide pre-trade, execution and post trade which is naturally absorbed by the program traders. Investors in Korea, Taiwan, Indonesia, Malaysia, Thailand, Japan and Australia have engaging in this process for several years and are looking for that expertise, observes Mohideen. “The ETF flow has increased substantially over the last 10 years,” says Ryan Clendenny, head of agency program trading at Citi. “We actively trade for ETF fund managers and also for clients looking to create/redeem ETFs. Our ability to trade underlying constituent baskets for ETFs helps us to partner with the ETF provider and Institutional clients in the trade process.” The increasing interest in ETFs is also creating work for a combination of Delta One desks and program trading desks, which are involved in creating and redeeming ETFs. When a firm is looking for liquidity in ETFs, market maker program trading desks and Delta One desks provide a service called creation and redemption, which can only be conducted by authorised participants. If there is not enough liquidity on an ETF, a broker’s

Equity Investment Group at The Vanguard Group

desks can buy the underlying securities of that ETF, hand those securities over to the ETF provider, and they settle the ETF with the broker who hands it over to the client. “Program trading desks are providing that facility for a lot of clients across the globe,” says Mohideen.

The point of entry In an era of increasing costs and complexity, program trading desks can also offer a simple method for buy-side clients to access the growth that many Asian countries offer. “Our local market access and ability to provide one contact point for trading across the region has been very attractive to clients,” says Clendenny. “As we increase our local presence in the region and shift away from third party brokers we are able to offer clients a more consistent product and better pricing options. Any opportunity to differentiate our business through transaction cost analysis, lower execution costs, and pre/post trade capabilities is always a key factor for new clients as well.” He notes that the traditional program trading client has not changed much, for these services. “We still cater to large fund managers, indexers and quantitative portfolio managers,”

www.asiaetrading.com z Q1 2013 z Asia Etrader

he says. “What we have seen an increase in is clients looking for one contact point and one destination to send orders across all markets we trade in the region.” Where a broker’s program desk can offer additional value to the fund manager is in the multiple routes to liquidity it maintains. “Lower volumes are affecting traditional orders that use participation limits and per cent of volume parameters but alternative venues and dark pools have enabled clients to source liquidity and find new alternatives to market participation,” says Clendenny. “The buy-side is looking for value-driven programme trading desks, how they can provide liquidity, market conviction and execution advisory,” says Mohideen. “In a low liquidity environment the biggest issues are how to complete my portfolio and minimize market impact. On Crossfinder we are crossing US$400-500 million a day on average across the APAC region and we are reducing the market impact by crossing at the midpoint. We are looking at liquidity on the high ADV names which can take 3-4 days to complete. We ring-fence all of our program trading flow so only our programme traders can see it. At the same time we are able to tap liquidity across our cash equities platform with anonymity.”

risk

Taking a chance The continuing economic and financial gloom puts strategic risk management at the top of the priority list. Frederic Stephan runs through the critical points to consider.

he premium on risk professionals and systems is going up as trading firms try to control and avoid the costs of unpredictable loss and increasing regulation. Budgets allocated for risk systems and staff are increasing to match, but a thorough strategic approach is necessary to ensure that the spirit of regulation is complied with so that risk is mitigated by the measures. Risk is defined as the potential that a chosen action or activity (including the choice of inaction) will lead to a loss. The notion implies that the choice will have an influence on the outcome exists. Risk in the trading environment is divided into three groups: – Market risk of losses arising from movements in market prices. – Operational risk arising from execution of a company’s business functions. – Credit risk that client will default. Difficulties and complexities in managing risk are manifold. A technology platform should support the multi-layer hierarchy of the client from legal entity, to account, to user level. An effective risk management system must be able to drill up and down in this structure with risk processes that are able to work on local versus global exposure, central monitoring and local reporting. When applied pre-trade, risk checking cannot introduce too much delay and overall risk monitoring should be calculated and communicated at near real-time.

Categorising risk Market risk is probably the more challenging area. It should cover different instruments types based on different contracts and should be able to accommodate a global market. Operational risk covers security (logical and physical) and resiliency; the difficulty here is to set a limit where good is enough and to define the scope of the risk. Credit risk needs to follow on a dayto-day basis the worthiness of the client and must be fed with relevant data to be able to calculate limits and exposures. Risk monitoring needs speed, accuracy and adaptability to a complex and fast-moving environment. Traders responsible for monitoring exposure to a particular market variable measure delta, the rate of change for an instrument’s value versus that of an underlying asset;

gamma, the rate of change in delta versus the underlying; and vega, an instrument’s sensitivity to volatility, all providing precious information in lowering a firm’s exposure. At a higher level, a financial institution will rather use Value At Risk (VAR) to monitor numerous variables to assess the risk of a portfolio as well as capital requirements. VAR asks the simple question of “How bad can things get?” The user must choose two parameters: the time horizon and the confidence level. VAR can be calculated in a straightforward way for situations where the change in the value is linearly dependent on percentages changes in the market variables. In others situations, approximations are necessary, using approaches such as quadratic approximation for the change in the value of the portfolio as a function of percentages change in the market variables. Another approach is to use Monte Carlo simulation. Market risk incorporating liquidity risk focuses on the maximum exposure per contract expressed as a percentage of open interest or risk amount based on the liquidity of the product. The majority of market risk systems are in-house systems built with standard risk engines supplied by external vendors; the self-developed approach is favoured to support integration into existing complex processes which can be challenging, while the sensitivity and specificity of the analysis is highly proprietary. Nevertheless service vendors are on the rise, developing sophisticated knowledge and advanced methodologies that fit many proprietary models. Operational risk is usually based on error, failure or fraud. Fraudulent accesses to systems as are typically found in rogue trader cases are usually countered by tighter controls and frequent auditing. The biggest weakness is more on the human side: implementing a segregation of duty, following security procedures, disconnecting from the system during breaks and taking care of company sensitive information are as important as the most sophisticated technology. This is particularly true for booking systems and treasury systems which have been used to mask rogue trading in several highprofile cases.

“It has never been so easy to externalise business continuity, but doing so does not remove risk...”

Away from fraud, operational risk is more typically concerned with human errors such as ‘fat finger syndrome’, mitigated my ensuring order quantity is checked against a defined number of ticks, the daily volume, the average quantity, a limit on contract. Likewise order price is checked against average daily price movement, last closing price, market spread. Operational risk also deals with business continuity. Hosted data centre provision is booming because it proposes a turnkey solution with extra services such as cloud technology or co-location. It has never been so easy to externalise business continuity, but doing so does not remove risk; a data centre has its own intrinsic risks that companies should assess. Systems built to cover operational risk may be related to company policy such as changing passwords every quarter, or audit points to deliver at a specific date such as replacing legacy hardware. A system should typically allocate cases and set target dates for closing the cases. Often such systems will be able to assess the measure of how well the risk is handled with early warning to identify potential negative events that may arise. Such systems provide a governance, risk and compliance (GRC) solution designed to assess risks, identify weaknesses, reduce impact of negative events and improve business process performance. Software vendors provide a fully integrated set of functionality through implementation or software as a service. Credit risk is concerned with the solvency of a client and estimate probabilities of default and recovery rates, through credit rating and

Asia Etrader z Q1 2013 z www.asiaetrading.com

risk

Global Association of Risk Professionals

historical data probabilities. Credit default swaps (CDSs) provide a degree of hedging against default, although the initial phases of the financial crisis exposed the limits of this insurance when underwriters fail. Credit risk systems are essentially workflow tools that describe the research and assessment through several teams (risk, compliance and IT) and procedure of the risk a client is authorised to take. They require large amounts of data to pinpoint historical trends.

Desirable functionalities of a system Nowadays a single user can do as much as a full team of the past thanks to accessible tools such as Microsoft Excel, Visual Basic and others; a greater danger today is having a multitude of processes without any technical or model control, leading to heavy costs of integration and a serious lack of transparency. By providing a single system and simplifying the representation of financial data for the front-

and back-office, an appropriate solution can reduce significantly the number of systems and touch points required, reducing cost and operational risk at the same time as improving operational efficiency. The framework on which it is built must integrate easily with existing trading and booking systems. This will allow simplicity of implementation, embedded reconciliations, pricing model management, while reducing the cost and time involved in adding new instruments in order to improve time-to-market for new business. A powerful solution is built on a common scenario management framework shared by all systems and risk types. The solution should seamlessly integrate with existing systems to provide one dedicated system for all risk management functions. Functionalities include building scenarios, setting limits, creating reports, calculating risks for all activities occurring in the frontoffice system. All positions, models, valuations and pricing data must be aggregated

www.asiaetrading.com z Q1 2013 z Asia Etrader

consistently, allowing data to be delivered quickly and accurately. New products and models can be introduced in the front-office with minimal effort, circumventing the cost and complexity of maintaining a separate set of risk products and models. With a single, consolidated view of market risk indicators, risk managers can pursue fully informed, proactive business decisions. Drawing on real-time data, users get an accurate snapshot of their exposure throughout the day, together with comprehensive predeal analysis. This allows for the optimal management of risk and reward. By using one global front-to-back solution, capturing a consistent view of all positions, models, valuations and pricing, gives stakeholders one consolidated view of exposure. A single point of entry and single representation of data allows for rapid reconciliation and auditing of a firmâ&#x20AC;&#x2122;s risk profile giving key stakeholders peace of mind that rigorous risk mitigation processes are in place.

Opinion Who’s Who & Analysis

Kesara Manchusree Kesara Manchusree, is managing director of the Thailand Futures Exchange (TFEX), a subsidiary of the Stock Exchange of Thailand (SET). This year TFEX has launched US dollar futures and sector futures, and along with SET has been crucial in attracting overseas investors, ploughing capital into Thailand’s economy. She spoke with Asia Etrader about the Thai capital markets, the ASEAN Link, exchange competition, algorithmic trading and the regulatory impact of Dodd-Frank. How did you start your career in electronic trading? Kesara Manchusree: I have had various experiences in Thailand’s capital markets. I was a research analyst with a brokerage firm. I worked with the Thailand Bond Trading Association, which is where all bonds are registered and trading data is gathered. The Stock Exchange of Thailand asked me to develop its electronic bond trading platform some years ago and that’s when I started working for them. Bond trading at the exchange is about 15% of OTC bond trading in Thailand. Then the exchange wanted to develop its derivative trading where I moved to lead that project which I am currently involved with today. AE: How is Thailand positioning itself to be a regional trading centre? KM: Thailand was one of the first exchanges in Asia to move from floor trading to electronic trading and the cash equity market has been doing quite well. Currently, we are pursuing partnerships within the Indochina region. For example, at the Hanoi Stock Exchange we started helping them develop their matching engine six or seven years ago. In Laos, which just launched its exchange last year, we have been helping to operate their exchange as the country had no previous background. Korea Securities Computing Corporation (KOSCOM) sold them the technology but we have been helping them understand the business of running an exchange. We

“Thailand was one of the first exchanges in Asia to move from floor trading to electronic trading.” have also been working to develop the brokerage community in Laos and educate the regulators too. We are also in talks with Myanmar and have undertaken a memorandum of understanding (MOU) with them to help develop their capital markets. Of course we are part of the ASEAN link which is an important initiative. This allows for other regions to access our markets and the markets of our partner exchanges in the Link. We are very active in supporting and developing the region with the Thai capital markets being one of the key players here. AE: The SET recently upgraded its trading engine and introduced new trading rules, why is this and what does it hope to achieve? KM: The old system was developed from a platform we licensed from a US company but we had made so many customisations to it that it was taking longer to bring new

products to the market and market timing is very important to launch new products. We wanted to improve our own efficiency but also to the needs of the market participants regarding speed, reliability and connectivity to the system. Finally, the selection committee chose Cinnober which just went live in September. We can bring products faster to market but it also allows us, through the exchange application programming interface (API) and FIX Protocol, to access other exchanges, markets and international brokers. We have also just introduced colocation at the exchange when we launched our new platform. It’s still in the early stages of deployment but this will allow for members and certain clients to take advantage of being close to the exchange. The new trading rules were based on the matching logic of the Cinnober platform. In order for the SET to use the new technology we adapted to the new system. AE: Why has the TFEX been focusing on developing its derivatives trading segment? KM: The regulator issued a new policy allowing for derivatives trading in Thailand but it took almost 10 years for the laws to pass parliament as there was lots of discussion on what the way forward should be. By law a derivatives marketplace in Thailand has to be a public company. The Stock Exchange of Thailand is a special entity and not a public company but the Thailand Futures Exchange is publicly listed.

Asia Etrader z Q1 2013 z www.asiaetrading.com

Opinionwho’s & Analysis who

“We don’t want more regulation but reasonable regulation.”

Once the legal framework was created we put our blueprint together and we wanted to give the Thai market some tools for managing risk. The fund managers keep investing but they didn’t have the necessary tools for dealing with risk. The first product we launched was the SET50 Index. Then we wanted to offer the gold product as the market wanted to trade it so we came up with the 50Baht contract. Because of this we have seen the spot market growing. We then introduced silver and more recently oil and dollar baht futures. You may or may not know but we have another exchange in Thailand called the Agricultural Futures Exchange of Thailand (AFET) which trades in rice and rubber. We set that up over one year. The Stock Exchange of Thailand is actually managing the IT for that exchange too.

per cent so it’s very small. There is already a lot of regulation to control this kind of trading. We have to ask ourselves is this regulation on par with other exchanges, because that is our objective, to have a similar regulatory framework on algorithm trading. We don’t want more regulation but reasonable regulation.

“We think some products do need high frequency trading from a liquidity standpoint.” AE: What is your view of high-frequency trading (HFT)? KM: We are promoting program trading on the exchange as we believe our regulations and technology can support that business. We think some products do

AE: The SET is revamping its clearing and settlement with the Korea Exchange (KRX), can you tell us about that? KM: We are planning to upgrade our derivative trading engine to Cinnober in Q1 2014 but we also need to upgrade the clearing piece too so we are going to use KOSCOM’s product. Our cash clearing is also on our old system and we plan to upgrade that technology using KOSCOM as well, but before we do we are starting with the derivatives matching then KOSCOM for clearing. We want to segregate trading of different clients, such as allowing for an oddlot market or trades from foreign sources or the Non-Voting Depository Receipt (NDVR) market. We can achieve this with the new settlement and clearing system. AE: Several overseas markets in and out of Asia have proposed or imposed measures designed to limit, prevent or tax high frequency and electronic trading; do you think algorithmic trading needs more regulation? KM: I think for foreign markets with active algorithmic trading then perhaps they should have more regulation, but here in Thailand program trading is only about 4 www.asiaetrading.com z Q1 2013 z Asia Etrader

“Algorithmic trading members are required to connect via a separate API.” need high frequency trading from a liquidity standpoint. We do have a cautious view however. Everyone is talking about HFT and we have been holding discussions with our regulator about this kind of trading. So far, I must say we haven’t seen any problems in our market but, if there is, our surveillance and trading rules would be able to detect it. AE: How is the SET and TFEX protecting itself against Flash Crash type incidents? KM: For algorithmic or program trading we require members to connect via a separate API that allows them to disconnect rapidly in case of any problems. Their regular trading won’t be affected but any algorithmic

Who’s Who

trading can be stopped right away. This is why we want to segregate it and this is another feature that Cinnober’s technology offers us. Also we have a circuit breaker policy with a [price movement] limit of 30% on the exchange and a 10% limit on the index futures market which, if exceeded, will halt the market for 30 minutes. We don’t allow naked short selling and can only go short on an uptick only. From our policies and surveillance we believe we won’t see any dramatic incidents like the Flash Crash. AE: How will the ASEAN Trading Link benefit the region? KM: I speak from the perspective of Thailand of course. The ASEAN Economic Community, of which we are a part, will have a free trade agreement of sorts in 2015 that will allow for the free movement of goods, capital and people and the ASEAN Link is a part of this economic development. While we have only just begun operating within the ASEAN Link we see that this will allow for more direct investment into Thailand. Local investors will now have more exposure to foreign investments as well. It will benefit the local brokerage community in that they can move from the domestic market and have a more international view of growing their

“For the US regulator I would like for them to be clear about what they want for Dodd-Frank.”

to the players. I see derivatives coming into play in ASEAN as well. Right now it’s just cash trading but derivatives will come next. AE: What is your view of exchange competition around the world? KM: I think everyone is competing with each other. The competition seems to be turning to cooperation if each side can do more business.

“We won’t see any

business. I see that it will benefit all aspects of the capital markets industry. AE: How do you see the ASEAN region developing over the next five years? KM: Well certainly more exchanges outside of ASEAN will want to connect to this linkage such as Korea. I see more than just the [initial] five ASEAN countries in ASEAN linking up, [with others] like Cambodia and Laos that I mentioned earlier. On the clearing side you will see a lot of cooperation. Trading isn’t difficult as there are a lot of inter-dealer brokers through ASEAN but clearing will provide a lot of convenience

dramatic incidents like the Flash Crash.” AE: Is Thailand ready for exchange competition? KM: We are aware that we are a monopoly in Thailand but under the law anyone can set up a futures exchange as a public company. You just need to apply for the license. Even though we do have a monopoly the investor can chose where to put their money and because of this we don’t really

“I see more than just the five ASEAN countries in ASEAN linking up like Cambodia and Laos.”

think we have a monopoly. We are competing with all other exchanges around the world. If you take our gold contracts, the margins are pretty much the same as other exchanges. If you take our exchange fees these have to be competitive as well. We have to be at the same level as other exchanges. We allow give-up and omnibus accounts. One of the reasons for the new technology at the exchange is to remain competitive. If members are unhappy they will leave. We can’t control currency of course but it is the current policy of the central bank to protect the Thai baht. At the end of the day we are competing with the rest of the world. Asia Etrader z Q1 2013 z www.asiaetrading.com

who’s who

“On the clearing side you will see a lot of cooperation.” AE: What are some of the regulations you would like to see changed in Thailand to help foreign investors access the market? KM: I would like to see protective regulation and foreign exchange loosened up. We would see some foreign currency denominated products and we think it would attract foreigner participation to trade USD / Baht futures or USD SET50 index and even see these products listed abroad, for example on the CME Globex platform. As it stands now, foreigners participating in the Thai market don’t have any hedging tools as they are not permitted to trade the currency. We have spoken with the central bank and regulators about the benefits of opening up trading of the Baht to foreigners. On the cash market foreign investors are only allowed to own up to 49% of a company and we would like to see some changes to the NDVR to increase the ownership limit. AE: What is your view of all the regulation changes in the US with Dodd-Frank and MIFID 2 in Europe? KM: I think the US market is big and powerful. We cannot avoid the US as we have to transact with them and that’s a problem. If I didn’t have to trade with the US I wouldn’t but we cannot [avoid it]. For the US regulator I would like for them to be clear about what they want for Dodd-Frank and it should be easier to understand what we need to do. The whole industry has been putting in a lot of effort through meetings, advisory costs, legal costs, it is very costly. We hope that with the new president there will be some clarity at the CFTC and SEC and spell out what kind of regulation we need. My view is that the market will slow down next year as everything has to be implemented. Then there is Foreign Account Tax Compliance Act (FATCA). There is a bilateral agreement with each financial institution that has to apply to the AIS (Accounting Information System) by itself. This is very expensive and would make life easier for the industry if we didn’t have to do it at all. If at the government level there was an agreement it would be much easier for the industry. We would submit all

“Under the law anyone can set up a futures exchange.” our information to the Thai government and the government would then submit to the AIS. This would be much easier, otherwise everyone would be sending information individually which is very difficult and very costly. MIFID II is quite clear and everyone knows what they have to do. AE: What are your predictions for 2013? KM: I see that the Thai cash market will continue to do very well. Listed companies have been producing a good return of around 15%. On the derivatives side with the equity products, they should grow following the underlying product. For commodity derivatives there is a mixed view on performance from the experts as they say both that gold is going up or going down. It is not clear. The participants trading gold are concerned what business

www.asiaetrading.com z Q1 2013 z Asia Etrader

they should add into their portfolio to diversify risk. You can see even this year at some exchanges volumes of commodity derivatives have dropped 30 or 40%. We have both types of derivatives commodities and index products and have seen volumes up by 7%. For next year there is a lot of caution particularly because of the US market regulation changes and with technology. For example if position limits are implemented many of the exchanges will have to use technology to impose this rule as well as monitoring. The US cash market will perform better as regulations are mostly on the US side.

equities

One year on: Competition in Australia As Chi-X Australia celebrated its first year in business Australian authorities unveiled new measures this November for curbing automated and high-frequency trading (HFT). Is Australia a hostile environment for competition? Roger Aitken writes.

he Australian financial market landscape has certainly changed since Chi-X Australia (Chi-X) was approved by the Gillard Government and commenced business on 31 October 2011 against the Australian Stock Exchange (ASX), the incumbent. As a new exchange, this Chi-X Global Holdings subsidiary has steadily increased its market share, claiming to have 8.99% on 30 October 2012 and more recently claiming a high of 12.4%. For some observers Chi-X entry has provided a shot in the arm for competition in a relatively stagnant market over 2012, whilst others like ASX chairman Rick HollidaySmith noted at the exchange’s latest AGM “a deterioration” in the quality of the local market. Still, the new operator’s entry would appear to have prompted ASX to cut fees,

introduce new products and make investments in its businesses. Steve Woodyatt, CEO and founder, Object Trading, a Sydney-headquartered vendor that provides a single interface to the world’s markets says: “I do believe that competition will lead to more volumes and often it does lead to better liquidity. Additionally, it has given the market place a bit of a shake and wake-up call… getting the ASX much more engaged with their stakeholders.” Chi-X touts a lower-cost alternative to trading equities on ASX using a low-latency and high performance trading system. Innovative new orders types have been seen and according to Chi-X figures it has generated A$2.5m in price improvement during year one for a diverse client base spanning large institutional brokers, retail brokers and market makers.

Collectively these participants (totalling around thirty) helped the fledgling operator’s trading turnover exceed A$17bn over this same period. According to Peter Fowler, CEO for Chi-X Australia, “trading fees have reduced substantially”. Commenting in the wake of proposed new market integrity rules unveiled this November, Fowler noted: “Around 20% of all trades on Chi-X Australia offer price improvement opportunities. This is already saving investors and trading participants millions of dollars and this total amount will grow strongly in the coming years.” David Jenkins, head of business development in Asia at Fidessa, a British headquartered software vendor that has provided the ASX with its new multi-market terminals, commenting says: “It’s going well for

Asia Etrader z Q1 2013 z www.asiaetrading.com

equities

them [Chi-X] given the headwinds that they have faced. We always predicted that at certain levels of resistance volume would take off and when market participants started to deploy the current generation smart order routers and re-directed order flow from the incumbent… there was a breakthrough to 5% market share level.” When Chi-X first commenced operations in 2011 best execution rules in Australia had not been fully finalised, which meant market participants had no clear guidance on whether they were obliged to route to Chi-X. Jenkins says “In essence the rules stated that: ‘If you can prove that there is a better price at the alternative venue then you have to go there’, mirroring a kind of best practice and similar to European legislation.” The Australian Securities and Investments Commission (ASIC), the national financial regulator, in fact extended its transition window for participants to establish compliance with the best execution obligations in the ‘Market Integrity Rules (Competition in Exchange Market)’until 1 March 2013. A transaction levy was introduced in 2012 by the Treasury, which is intended to pay for the costs that ASIC accrues in dealing with capital markets. It covers the number of cash equity transactions executed and associated messages (i.e. including trades, order entry, amends and cancellations). Whilst penalising equities, it exempts equity options, the futures markets and trades/messages in dark pools. As an activity based fee it is calculated by taking each market’s share of non-IT costs, multiplied by the number of transactions made on their platform. Concern about the levy affected both exchanges. Elmer Funke Kupper, ASX CEO said at exchange’s October AGM told shareholders that current levels of trading activity during for 2012 had been “subject to the continued global economic uncertainty and a moderate softening of economic growth in Australia and the Asian region.”. Evidencing this, ASX figures showed cash equities market activity for the first three months of the current financial year was below the prior corresponding period, with a similar picture seen on ASX24 (derivatives). HFT and short-term market-making players typically place huge numbers of small equity orders, a large portion of which can then be cancelled to avoid trading at adverse prices. That model will create costs for a venue out of proportion to the revenues HFT firms generate. That potentially hurts Chi-X, which has been courting such firms as a source of liquidity; Getco, an HFT market maker, is reported to have account for around 30% of the operator’s liquidity (see ‘Asia Etrader’, Q2 2012).

“I do believe that competition will lead to more volumes and often it does lead to better liquidity” – Steve Woodyatt, CEO Object Trading

Regulatory Burden Increased costs for the firms that use Chi-X Australia may also impact its business. Adding to the regulatory burden for electronic trading firms, new Market Integrity Rules were unveiled on 20 November 2012 by Bill Shorten, Australia’s Minister for Financial Services and Superannuation. Developed following extensive ASIC consultation, the measures are slated to come in four phases over 2013-2014 and are designed to better protect investors. From November 2012 new extreme trading rules applied in cases of large price movements. A Meaningful Price Improvement rule (June 2013) requires that dark pools offer meaningful price improvement over the lit market (exemptions for block trades). Additional data reporting requirements will assist ASIC in performing market surveillance (November 2013). And, kill switches, automated extreme trading range control, enhanced data supervision (June 2014) are designed to immediately stop algorithms. Additionally, two internal taskforces have been launched focussing on dark liquidity and HFT, with ASIC set to report on its findings to the Government in March 2013. Consideration is being made for raising the minimum order threshold for dark trading above A$0. ASX has proposed an A$25,000 threshold while ASIC previously suggested A$50,000. Recent numbers indicate that high frequency traders in ASX’s revenue line were between “15% and 25% of the market.” Object Trading’s Woodyatt, who worked on the buy-side in the late 1990s when he was a Commodity Trading Advisor (CTA) manager and ran a hedge and futures fund, is perhaps well placed to comment on implications from added regulation and compliance.

www.asiaetrading.com z Q1 2013 z Asia Etrader

“The context here is that the overall costs for the whole [securities] industry are going up by exchanges increasing data and technology charges, which only gets passed on to one place,” he says. “It has to go to the buy-side – fund managers and pension funds – and ultimately end investors and consumers.” That backdrop added to the heightened costs of meeting new regulations could, he believes, lead to some broking firms going out of business or being forced to consolidate. On merits of the new market integrity rules, having been consulted by ASIC on a dual market topology before Chi-X gained its licence, Woodyatt says: “The regulators have taken a cautious approach that is quite appropriate. As with other jurisdictions in Asia Pacific, Australia wants to learn from the experiences in Europe and the US and attempt to get it right.” He adds: “Whilst it increases uncertainty amongst market participants in the process as to what precisely might be required, equally it could mean they come up with better solutions for the long run. The old adage of not rushing in is wise and especially given the reputational risk of the market place is at stake.” Putting numbers on extra costs, Funke Kupper told an audience of stockbrokers in May 2012 that: “Brokers face materially higher compliance and IT costs in the new world. Together, the increase in these costs exceeds A$17m. The net result is that retail investors are unlikely to see a reduction in their broking fees and smaller broking firms will find it harder to compete.” He added: “The new market structure has had a positive effect. ASX reduced its trading fees, improved its product suite, built a new A$36m data centre and we are becoming more externally focused.” This year it intends to rebate 50% of trading tariffs. Chi-X Australia’s growth in market share under these conditions has provided positive affirmation of its business model, and there still are avenues left for it to explore to lower costs further. A debate is also likely heat up in 2013 over the tangible benefits to end users from any change to the clearing landscape and the business case for clearing fragmentation. With the total cost of cash equities clearing put at A$46m per annum, most analysts estimate a second clearing house could reduce these fees by A$15m-A$20m. However, “material costs” estimated by ASX at A$20-A$30m, could their CEO suggests “more than offset” potential savings due to reduced netting efficiencies in clearing and settlement, higher IT and regulatory costs.

fragmentation

Fragmentation Footprint Asia 2012 Japan We start with the fragmentation story in Japan where 2012 marked the turning point for the legitimacy of the Proprietary Trading System (PTS). With years of being passed over and recent consolidation, last year saw improved take up at Chi-X Japan (Chi-X) and SBI Japannext (SBIJ). The latter having been operating for some years and the former a little more than a year have together managed to capture around 7% of equity trading at the end of 2012. The newly formed Japan Exchange Group (JPX) with the lion’s share at 93% (both TSE and OSE) of equity trading hopes to be a lean competitive venue both locally and abroad. It should be noted that the auction which the PTSs don’t participate in were not included in market share calculations. Notional traded during the TSE auction accounts for around 5% of total turnover according to Thomson Reuters Equity Market Share Reporter. An important step in the development of competition and choice was in late October, when the Takeover Bid Rule (TOB), a key obstacle for the growth of PTS venues, was finally amended so that alternatives could now allow clients trading more than 5% of a name over a sixty day period. Previously, the acquiring firm would have needed to formally takeover the company. For the big Japanese buy-sides that was an issue. There are two more obstacles for the further development of the PTSs. First, margin trading isn’t permitted and the 10% rule where PTSs must automatically apply for full exchange status if 10% of market share is realized on their venue. In terms of a competitive primary they would be well served to reduce the tick sizes to match the PTSs but due to structural issues within the industry as a whole this will be difficult. One of the other fundamental policies that has to be addressed is that best execution criteria is only vaguely spelled out where nothing specific to routing to the best price is required. With the winds of change sweeping market structure in Japan it will only be a matter of time before these obstacles will be overcome. If we take a closer look at some of the data we can see that SBIJ managed to gain less than 1% market share over the year with Chi-X ending the year about even. Both venues like to report market share vs Nikkei 225 which shows a slightly higher market share (Chi-X 3.1%, SBIJ 4.46% by value December 2012). Looking to figure 1 Chi-X struggled all year with a summer time low of just under 1.5% market share but they seem to have regained their momentum. Ch-X has consistently reduced its average trade size and has the lowest in Japan at around 600 shares worth close to US5,000. In December, with volatility rising rapidly from the uncertainty of the US Fiscal Cliff and the weakening yen boosting the outlook for exporters, volume across Japan surged to its third highest Asia Etrader z Q1 2013 z www.asiaetrading.com

fragmentation

month of the year. In turn, market share at Chi-X grew with a slight decline in average shares per trade with each of the other venues showing an increase. This is indicative of algo driven trading within Chi-X whose members are probably taking advantage of pricing inefficiencies in a volatile market. SBIJ managed only to hold their market share even but did participate in the increased volume. Average trade size based on shares increased year over year but held a tight range from 600 – 800 shares for the last 12 months. In terms of notional SBIJ ranged from US5,000 – US6,000 ending the year where it started at the lower end. SBIJ has retail flow and a night session so any obvious HFT will be buried requiring further forensic analysis. The primary had a large increase in average share trade size alluding to less high frequency trading than you might otherwise expect. Estimates are around 25%. We kept average share price of OSE and TSE separate as the former is much smaller than the latter and would skew the TSE data lower. If we look at the top 10 securities traded on the PTSs by value we see some of the same names like Toyota (7203), MUFG (8306) and Mizuho (8411). Looking at the 10 top securities by price improvement there is only 1 name found on both lists NISHI-NIPPON CIT (8327) indicating that each venue is finding liquidity in different names and that connecting to both venues for optimal price discovery and best execution would be prudent. According to data provided by SBIJ from January to November 2012 the top 10 securities averaged 7.38 bps (4.62bps without Mizuho) of price improvement or around US15million. In the last week of December SBIJ reported price improvement of 6.63bps for large caps, 11.08 for mid caps and 11.34 for small caps. According to data posted at the Chi-X website price improvement for the month of December averaged 8.5bps for Nikkei 225 names. Price improvement data for the top 10 securities for December were not available at Chi-X so no comparison to SBIJ can be made. We think 2013 will see continued growth of PTS market share in Asia in light of the regulatory changes and the acceptance of alternatives in Japan. How will JPX meet that challenge?

Australia Chi-X Australia has been gathering market share and buy-in from the industry from day one. Market share has done nothing but grow and forced the ASX to up its game. The way market share is reported depends on who you ask. Chi-X calculates market share as “(Chi-X value) / (Chi-X value + ASX value) for On Market trades in Chi-X tradable securities”. The key phrase there is On Market Trades. It only considers trades that are not OTC in nature which www.asiaetrading.com z Q1 2013 z Asia Etrader

fragmentation

Centre Point November 2012 Rankings

Top 5 Brokers by Value

Value Traded ($M)

Trades

$1,137.90

748,407 1,520

DEUTSCHE

$690.90

306,286 2,256

GETCO

$499.00

169,574 2,943

CITIGROUP

$480.30

162,897 2,948

MACQUARIE

$442.40

131,895 3,354

UBS SECURITIES

Top 5 Brokers by Volume Trades

UBS SECURITIES

Value Traded ($M)

Avg Trade Size

748,407 $1,137.90

1,473

DEUTSCHE

306,286 $690.90

2,256

INSTINET

250,943 $105.60

421

214,279 $269.40

1,257

169,574 $499.00

2,943

CREDIT SUISSE

GETCO

Source: ASX Centre Point Report

* Participant totals are double-sided

Chi-X Australia Security Rankings

Top 10 by Volume Avg bps Symbol Volume

Top 10 by Notational A$ Symbol

Volume

Avg bps

TLS

372,781,849

18.86

BHP

2,426,672,044

3.00

LYC

224,939,978

47.25

WBC

2,299,600,573

4.29

FMG

217,246,858

19.59

ANZ

1,684,852,143

4.12

BSL

201,252,112

90.99

NAB

1,477,017,223

3.94

AWC

189,887,455

46.22

TLS

1,422,344,122

18.86

FXJ

189,876,007

73.99

CBA

1,231,717,732

2.11

DXS

155,106,069

39.48

RIO

999,761,986

2.13

MGR

144,247,014

28.55

FMG

917,610,302

19.59

QAN

121,742,308

31.79

QBE

696,957,616

7.66

WRT

120,273,136

26.24

WDC

637,782,495

8.99

make up a large percentage of ASX reported volume (around 20-25%). In a report ending December 28 Chi-X held 9.5% of market share based on that equation. The ASX sent their own report on cash trading with data for December 31 that said on market trading for Chi-X was 3.6% and in terms of lit and dark for a total market share of 8.8%. Our Thomson Reuters Equity Market Share Reporter said Chi-X was 5.5% without the ASX auction and 4.3% with. Confused? Chi-X needs to show the industry and perspective members that they are a viable source of liquidity and ASX needs to show that they are unaffected by Chi-X and tend to downplay the market share. At any rate we present to you the equity breakdown from the ASX weekly report and Thomson Reuters where you can decide for yourself. We all agree that Chi-X Australia is capturing market share and while too early to tell is likely growing the total execution pie. A closer look at the market structure reveals many things. We report data that is ex-ASX auction. Just a note that 12.6% of volumes are traded in the ASX Auction with 15.67% of notional executed during that time. For 2012, Chi-X averaged 625 shares per trade valued at US2,593 where the primary was 2,362 shares worth US5,282. Chi-X remains in a tight range on both counts while ASX is decidedly trending lower in both average trade sizes. These lower trade sizes indicate that HFT or algo driven trading is revealing itself as buy-sides have more choice where to trade and can search out price discrepancies and inefficiencies. While more research is needed

Asia Etrader z Q1 2013 z www.asiaetrading.com

fragmentation

â&#x20AC;&#x153;Each venue is finding liquidity in different names and that connecting to both venues for optimal price discovery and best execution would be prudent.â&#x20AC;?

the execution pie would appear to be growing here as well despite trading value and volume being down 20% and 30%, respectively. In 2012 the number of trades were lower by just 3.7%. Chi-X showed for the week ending December 21 that they yielded 20.11 bps of price improvement on A$355million or just over A$700,000. At the ASX, Centre Point Cross the dark venue/order type reported a record in November of A$3.2billion. The only price improvement information given was that A$106 million was saved since inception on A$37 billion which is 28.6 bps. There are 59 participants in Centre Point with UBS the dominant player in that venue. Trade sizes are relatively small inline with Chi-X with Instinet being the smallest by far at just A$421 in November. It would seem Getco is enjoying Australia competition as they have been steadily ramping up trading in this venue. They had the third largest by notional and fifth highest number of trades in November when they were not even making the top 20 rankings by value on just 9,800 trades in August. The ASX reported that Centre Point Block traded over A$10 million in November with an average trade size of A$16, 858.. Centre Point Sweep which routes unfilled order from Center Point to the CLOB executed over A$18 million with an average trade size of A$8,281 in November. We hope that ASICs Market Integrity Rules will force ASX to route to other venues in the spirit of best execution. Speaking of which ASIC brought in some amendments to the Market Integrity Rules (see page 36 One year on: Competition in Australia) largely to address the rise of HFT but the Meaningful Price Improvement rule expected to come into force in June 2013 requires that dark pools offer meaningful price improvement over the lit market with exemptions for block trades. Two points of note here are what constitutes a block? We can see average trade sizes in most venues are less than A$20,000 so what criteria will be used to define a block trade? The other item is will the ASX route orders to Chi-X if there is indeed a better price? Has the cost of competition been justified by the gains for the industry? From the data published on Center Point giving www.asiaetrading.com z Q1 2013 z Asia Etrader

fragmentation

“The BSE has by far the smallest order size of any exchange in Asia.”

back A$106 million so far seems that it has. Just how much will have to be a study for perhaps the Capital Markets Cooperative Research Centre.

India Competition is going to be heating up as the new entrant MCX Stock Exchange (MCX-SX) is expected to launch this January as the third national bourse in India. The regulator, SEBI, granted the company a “commencement certificate” on 19 December, 2012 and the Corporate Affairs Ministry bestowed recognised stock exchange status one week later. It remains to be seen whether any business will transact of course as the cost of multi market connectivity can be too high for the local market. Additionally, spreads are very tight in India at around 3-4 bps and its not certain whether any price improvement can be earned through agile algos and of course a third clearing house makes the post trade costs and risk management that much more burdensome. Market share in India has really been status quo for much of the year with very little change though it appears that the NSE is gaining ending the year 0.64% higher. At the end of 2012 the NSE held 82.53 % and the BSE 17.47% of equity trading in India. The BSE average trade size was down year over year in terms of value and number of shares realizing US537 and 287 shares respectively. The BSE has by far the smallest order size of any exchange in Asia where the number of trades declined by 5.27% to 204 million. The larger NSE also saw its average share in dollars decline 8.13% to US1,326 but the number of shares of the average trade grew by 20% to 434.

Hong Kong Not too much to say here other than average trade sizes were down 11.60% by value to US13,890 and 18.11% by shares to 23,778. Number of trades declined 12.24% to 84,549,419 and notional turnover 22.42% to US1.17 trillion. Market share for internalised trading is known but is generally only revealed at speaking engagements and stands around 2- 3% or around US3 billion last year. The exchange did decrease the reporting window for ATS trades from 15 minutes to 1 minute. We expect them to being report this data some time this year. Asia Etrader z Q1 2013 z www.asiaetrading.com

109,793,858,161

2,116,801,669

Hanoi SE

1,149,960,870,555 1,615,143,696,693 -465,182,826,138

64,435,771,244 5,055,781,200

1,674,713,700

-5,686,235,603

www.asiaetrading.com z Q1 2013 z Asia Etrader

41,107,634,408

237,257,558,806

2,589,286,859,541 3,653,202,787,721 -1,063,915,928,180 -29.12% 2,084,952,309,453 2,313,561,702,162 -228,609,392,709

2,338,879,325,791 2,806,782,820,224 -467,903,494,433

672,347,210,927

234,289,221,911

3,513,883,637,867 3,995,381,296,135 -481,497,658,268

14,372,549,410,998 17,875,219,998,643 -3,502,670,587,645 -19.60% 11,283,831,747,634 12,171,419,707,651 -887,587,960,017

PSE

SGX

SSE

SZSE

TWSE

SET

TSE

Total

6,028

537

1,041

ASX

BSE

Hanoi SE

Hochiminh

13,890

3,179

3,374

1,067

6,316

9,815

1,326

6,972

7,201

10,839

2,844

7,112

15,613

5,284

16,942

HKEx

IDX

KRX

KOSDAQ

BMB

NZX

NSE

OSE

PES

SGX

SSE

SZSE

TWSE

SET

TSE

2,702

2012 (USD)

11,548,020,763

-224,422,798,583

-38,882,706,063

8,861,707,857

-47,250,111,814

-67,493,885,853

19,426

7,646

18,824

9,165

2,887

18,920

7,852

8,462

1,444

7,197

6,277

1,363

4,604

3,910

15,712

2,883

1,106

688

7,271

2011 (USD)

-2,485

-2,361

-3,211

-2,053

-43

-8,080

-650

-1,490

-117

361,181,116

23,719,955,417

-4,636,932,135

Shares 2012

-12.79% 2,291

-30.88% 25,120

-17.06% 12,200

-22.40% 4,996

-1.48% 2,290

-42.71% 19,953

-8.28% 176,856

-17.60% 837

-8.13% 434

36.37% 4,352

0.63% 12,980

-21.68% 335

-26.72% 383

-18.71% 26,706

-11.60% 23,778

-6.26% 4,035

-5.88% 2,509

-21.86% 287

-17.09% 2,603

% Change

Average Trade Size

2,387

31,014

13,920

4,866

1,828

19,774

243,963

973

360

4,935

11,574

366

276

33,380

29,034

3,301

1,879

299

3,579

Shares 2011

Average Trade Size

-6.44%

-3.75%

-27.29%

-19.99%

-18.11%

-8.47% -11.81%

-27.51%

-14.01%

-96

-5,894

-1,720

-4.01%

-19.00%

-12.36%

130 2.67%

462 25.26%

179 0.90%

-67,107

-136

3,253,960,499 3,549,361,373 -295,400,874

% Change

-7.29%

-8.32%

-3.20% 207,412,027 205,669,022 1,743,005 0.85%

74 20.57%

-583

-9.61%

23.26% 44,336,574 29,133,091 15,203,483 52.19%

-20.78% 43,062,573 47,639,511 -4,576,938

1,406 12.14%

-31

-28.06%

10.25% 328,865,584 306,253,257 22,612,327 7.38%

-9.88% 910,487,161 1,265,568,786 -355,081,625

51.32% 21,888,611 14,595,407 7,293,204 49.97%

0.76% 5,708,398 4,106,961 1,601,437 38.99%

-3.58%

107 38.88%

-6,674

-8.14% 164,368 27.06%

-19.55% 22,798,697 24,369,062 -1,570,365

607,495

16.26% 394,768,649 409,418,242 -14,649,593

12.05% 771,863

3.01% 18,866,732 20,539,585 -1,672,853

733 22.21% -5,257

-2.84%

8.97% 435,967,760 366,192,353 69,775,407 19.05%

34.93% 340,853,016 350,817,668 -9,964,652

-14.89% 29,634,478 27,856,191 1,778,287 6.38%

-12.24%

891,695 44.85%

77.03% 2,879,825 1,988,130

-28.13% 84,549,419 96,345,166 -11,795,747

209,649 11.49%

48.87% 2,033,499 1,823,850

630 33.52%

-11

-977

% Change

-5.27%

Net

-3.72%

2011

Number Trades

-8.82% 204,358,602 215,737,372 -11,378,770

2012

Number Trades

-30.00% 154,717,031 160,700,224 -5,983,193

% Change

Change

-12.05% 475,248,251,702 490,952,717,412 -15,704,465,710

5.18% 1,113,722,137,780 903,521,592,580 210,200,545,200

-25.03% 525,355,133,300 663,141,480,300 -137,786,347,000

-16.67% 1,643,068,132,887 1,490,291,682,276 152,776,450,611

-14.08% 436,738,126,009 288,611,136,652 148,126,989,357

27.48% 1,009,562,568,757 1,001,946,710,226 7,615,858,531

-22.91% 19,083,023,282

2,618

-295

-1,230

-732

-1,822

-181

-65

-150

-1,243

Change

2,997,989,636

-11.42% 171,250,609,503 147,304,760,923 23,945,848,580

Average Trade Size

222,741,201,148

896,770,009,510

276,140,264,869

32,245,926,551

206,210,874,655

591,139,011,108

Average Trade Size

Exchange

158,960,762,841

523,645,125,255

OSE

73.27% 3,359,170,752

-7.57% 244,890,373,600 237,733,740,000 7,156,633,600

NSE

3,203,316,103

-9,760,134,711

7,575,484,843

NZX

4,372,168,740

128,927,021,766

119,166,887,055

BMB

33,809,490,886

-6.76% 146,073,570,393 134,050,871,155 12,022,699,238

-28.80% 130,591,126,667 96,781,635,781

-13.52% 791,415,118,765 929,840,183,276 -138,425,064,511

-22.42% 2,010,381,314,167 2,797,333,195,693 -786,951,881,526

35.78% 11,619,361,520 6,563,580,320

4.94% 5,101,693,000 3,426,979,300

-25.98% 58,749,535,641

498,973,369,084

-33,729,413,318

Net

-20.18% 402,670,190,456 575,204,023,298 -172,533,832,842

2011

Share Volume

KOSDAQ 465,243,955,766

-14,728,783,489

KRX

108,924,938,869

94,196,155,380

IDX

2,050,717,968

99,718,147

-38,531,529,316

1,174,414,936,970 1,513,809,114,165 -339,394,177,195

5,731,340,787

2,017,083,522

148,325,387,477

HKEx

Hochiminh 7,782,058,755

932,641,064,497 1,168,381,685,619 -235,740,621,122

BSE

Share Volume

% Change 2012

ASX

Net

2012 (USD)

2011(USD)

Value Share Trading Value Share Trading

Exchange

equities

Equity Trading Recap

Source: Thomson Reuters Equity Market Share Reporter

equities

Asia Etrader z Q1 2013 z www.asiaetrading.com

equitiess

www.asiaetrading.com z Q1 2013 z Asia Etrader

heading

lectronic trading in Asia has gone through a remarkable transformation and uptake as regional exchanges and regulators have modernised key infrastructure for the region’s growing wealth and middle class. Increasingly active pension schemes, commercial enterprises and professional trading coupled with the growing in¬fluence of China and India have forced Asian nations to build healthier and more competitive capital markets. As a consequence, electronic trading has been growing rapidly. Brokers use algorithms to automate the increasing volume of trading; regulatory change and exchange technology transformation have facilitated prop trading, market-making and other computer–based trading. How much change has there been? What are the challenges firms face? What markets and products will they trade in the future? The Asia Etrading 2012 Algorithm Survey has been created to answer those and many more questions in a careful examination of the underlying forces shaping this industry only in its infancy in APAC.

Survey approach A common misconception is that Asia is one large united region but the reality is that these countries are individual nations who prize their stock exchanges and corporate champions as much as anyone. Additionally, these countries either historically or through investment in different industries are at varying stages along the algorithmic trading curve. That said, a homogenous survey across Asia would not truly drill down to measure the environment, challenges and uptake of algorithmic trading. Instead we conducted five individual surveys for Australia, Hong Kong, India, Japan and Singapore, addressing the specific needs of those countries. These five countries were selected for various reasons.

Australia and Japan for their competitive and changing market structure, Hong Kong and Singapore as a magnet for international firms and smaller prop shops and India for its rapid growth in electronic trading.

Survey content and goals Algorithmic trading is conducted on both the buy- and sell-side with each group having different needs and goals, leading us to investigate both perspectives of the trade. These surveys are not just about high -frequency trading or the consumption of VWAP algos but, instead, measure both sides of electronic trading and everything else in between. Specifically, we look at algorithm usage, how they are developed, inputs to algo decision making and various other factors around the construction of an algorithm. We address market structure concerns such as competition in Australia, proprietary trading systems (PTSs) in Japan and Hong Kong’s closing auction to name just a few. Regulatory insight is also examined as algorithmic trading garners further scrutiny. Best execution, anonymity and surveillance are some further topics that we bridge. We go into asset classes, which are being traded and will be traded in the future. Colocation and proximity hosting are growing businesses as the buy-side wants speed and the sell-side wants to be close to market data and other pools of liquidity. We asked around 50 questions for each survey with 48 for Hong Kong and 47 for Australia. Our goal with these surveys is to measure the breadth and width of algorithmic trading in developed Asia and lend insight to the shape of the industry, the challenges and where future investment could be allocated. What we present in the magazine is just an abridged version of our full report with accompanying infographics for further details. We start with a broad overview of Asia. Asia Etrader z Q1 2013 z www.asiaetrading.com

algo survey

Australia

he Asia Etrading Australia Algorithm Survey 2012 intends to examine the algorithmic trading landscape in the wake of the huge transformation Australia’s market structure has undergone over the past few years. A new venue in Chi-X Australia, new services for different kinds of customers at ASX, ASICs new policy (Market Integrity Rules) and oversight powers within the backdrop of the rising sophistication of global electronic trading make this a timely survey for Australia. Australia survey respondents were split 38% buy-side and 62% sell-side. The buy-side survey population was split between hedge funds at 46%, proprietary houses at 31%, family offices at 15%, and long-only firms at 8%. Assets under management range from AUD0-50mn (US$0-52.53mn, 55% of respondents) and AUD50-100mn (US$52.53mn-105.06mn, 27% of respondents) to AUD250mn-500mn (US$262.64mn-$525.28mn 18% of respondents). The majority of sell-side (89%) and buy-side (73%) respondents work in trading roles, with a further 14% of overall respondents working in technology roles. As to whether respondents expect to increase their access to the market in the near future, the majority of the survey population (72%) does not anticipate expanding access, with 78% of sell-side respondents and 64% of buy-side respondents answering in the negative. Nobody reportedly intends to go through ASX only or Chi-X only. However, 14% of the survey population expects to increase access through both ASX and Chi-X. While 18% of the buy-side survey population expects to increase access through two to five brokers, nobody on the sell-side expects to do so, and nobody on either side reports expecting to increase access through multiple brokers, though 11% of sell-side respondents said they expect to add one broker.

Algos The top reason cited for using algorithms to trade is because there are too many orders to trade manually, which was cited by 31% of overall respondents and was the top answer on the sell-side and equal first answer on the sell-side along with pure profit. The second most cited reason on both the sell-side and buy-side is to minimise impact cost, and the third, again on both the sell-side and buy-side, is finding liquidity. On the sell-side, the equal third response is improving trading performance, though nobody on the buy-side trades using algorithms for this reason. Just over two thirds of respondents build their own algorithms, while 45% of buy-side respondents use third party algorithms only, but nobody on the sell-side relies solely on third-party algorithms. Although no buyside respondent reports using a mix of their own and broker or third party algorithms, 22% of sell-side respondents do. In terms of the ratio of algorithm trading versus direct market access (DMA), the main trend is that sell-side respondents rely more on the latter than the former, and buy-side respondents rely more on the former than the latter. Eighty-eight percent of the sell-side population trades within the 40% algo-60% DMA to 10% algo-90% DMA range, while 100 percent of the buy-side survey population trades within the 60% algo-40% DMA to 100% algo range. A similar pattern can be discerned in the relationship between algorithmic trading and high touch trading. Sell-side respondents rely more on high-touch trading than buy-side respondents, who trade with a higher percentage of algorithms. of the buy-side survey population trades within the 60% algo-40% high touch to 100% algo range, and the sell-side

population trades within the 20% algo-80% high touch and 70% algo30% high-touch range. Turning to the challenges of list and basket trading, sell-side, respondents put hedging and liquidity (44% each) at the top of their list, followed by managing risk, exchange throughput and slippage equal second (22% each), good algorithms and multi-market access equal third (11%), and last not but least trading software (6%). Buy-side respondents report encountering far fewer challenges than the sell-side. Multi-market access headed their list with 36% of survey participants finding it problematic, which was followed by competent brokers (27%), hedging (18%) and trading software (9%). Overall, nobody reported that list/basket trading takes to long to complete, or that they find post-trade breaks a challenge. Moving to algorithmic trading, the sell-side is much more active than the buy-side, in terms of both the number of asset classes traded this way and the extent to which algorithms are used. The most prevalent class on both sides is cash equities, but double the number of sellside respondents, 89%, than buy-side participants report trading it this way. Second on the buy-side is index futures/options, followed by FX futures/options, fixed income/debt, fixed income derivatives, ETFs, and commodity derivatives equal third. On the sell-side, ETFs and single stock futures/options came in second, followed by index futures/options third, warrants, spot FX and OTC equal third, fixed income derivatives fourth and commodity derivatives last.

Latency Of respondents who said they expect to invest in reducing latency, the big story is that colocation/proximity is a big trend for the sell-side, with 89% of respondents saying they expect to reduce latency this way, whereas the majority of buy-side respondents say they will not be making any further investment to reduce latency in the near term. Investing in developers is the second most popular sell-side method of reducing latency As to why market participants use hosting facilities, the buy-side does so predominantly because it doesn’t have any in-house IT resources. Lowest possible latency and the lower cost of IT services were cited as lesser reasons. The sell-side uses hosting facilities mainly so it can be as close to market data as possible, with two-thirds of respondents citing this reason. Another important reason for sell-side respondents is that they want to be as close as possible to other brokers.

Challenges As to the main challenges survey participants face, there are some similarities between the sell-side and buy-side. Finding qualified people, is the most problematic for the latter group, and the second most problematic for the former group. First on the sell-side is keeping on top of regulation, which the buyside ranked fourth, and third on both sides is exchange technology, while fourth on the sell-side is finding alpha. Managing real-time risk was cited as the seventh most problematic challenge on both sides and volatility the least. Turning to regulation of algorithmic trading, buy-side and sell-side respondents are at loggerheads. Sixty-seven percent of the latter think there should be “much” or “somewhat” more, versus 45% percent of the former who there should be “somewhat” less. While 36% of the buy-side thinks regulation is ”fine the way it is,” 22% of the sell-side expressed the same opinion. Asia Etrader z Q1 2013 z www.asiaetrading.com

algo survey

Hong Kong

his market is the final monopoly hold-out amongst the developed markets in Asia. Hong Kong is largely a long-only market with a local pension called the Mandatory Provident Fund (MPF) and international players opening up regional offices to access the China market and take advantage of tax benefits. For the most part there is no high -frequency trading on the Hong Kong exchange but it does have a large issuer market in warrants. Nearly 19% of the total participants responded to the Hong Kong survey with 38% of those from the buy-side and 62% the sell-side. Of the latter, 56% work for an investment bank, followed by respondents from agencies at 38%. The buy-side survey population was split between hedge funds and market-makers at 30% each, proprietary houses at 20%, and individual and traditional long-only market participants at 10% each. Assets under management range from HK$0-100mn (30% of respondents), HK$100mn-250mn (30%) and HK$250mnHK$500mn (10%) and HK$5,000mn and over (30%). Half of respondents on both the buy-side and sell-side said their role is trading, while senior management was the second largest group on the buy-side at 30%, followed by technology roles at 10% and other positions at 10%. Technology roles and senior management rounded out sell-side respondents at 38% and 13%, respectively. Some senior management responses likely came from survey participants working in trading departments.

Algos The two main reasons cited for using algorithms to trade are improving trading performance and because there are too many orders to trade manually. On the sell-side, finding liquidity and minimising impact cost are the third and fourth most cited reasons, respectively, whereas for the buy-side the drivers were pure profit and minimising impact cost. Most respondents prefer to build their own algorithms, but a significant proportion of buy-side respondents only use broker algorithms, or broker and third-party algorithms. Seventy-two percent of respondents do not think high-touch trading will disappear, but 12% think it will, while the remainder are unsure. The six most prevalent algorithmic strategies on the buy-side are, in order of popularity, mean reversion, VWAP, arbitrage, implementation shortfall, pairs trading and trend following. On the sell-side, VWAP stood out as the most popular strategy, followed by participation and implementation shortfall equal second, and dark algo types and pegging equal third. Turning to the challenges of list and basket trading, slippage, liquidity, and exchange throughput were flagged up as problems. On the buy-side, trading software was also high on the list, while sell-side respondents indicated that managing risk is a top challenge. The most prevalent asset classes currently traded using algorithmic trading are cash equities, which 94% of sell-side and 60% of buy-side survey participants engage in, ETFs, which 84% of sell-side and 20% of buy-side respondents engage in, and index futures/options. The buy-side is heavily skewed towards cash equities and single stock futures/options, while on the sell-side cash equities and index futures/options top the list. Forty-four percent of the sell-side survey population uses algorithms to trade warrants, which indicates the level of respondents from warrant

market-making banks. Interestingly, no respondents use algorithms to trade fixed income/debt. In terms of the degree of dependency on latency to execute trades, 46% of all respondents said they are somewhat dependent on it; this was the top answer on the sell-side, but not on the buy-side. Forty-percent of buy-side respondents said they are mostly dependent on latency. Of the four response categories – “completely dependent,” “mostly dependent,” “somewhat dependent” and “not dependent” – the lowest overall score was completely dependent, with 12% of respondents answering in the affirmative, which reflects the low level of high-frequency trading in the Special Administrative Region.

Technology investment and requirements On investment in reducing latency, overall, sell-side respondents are keener on spending on technology improvements than buy-side participants. Thirty-one percent of sell-side survey respondents said they are certainly going to invest in reducing latency in the near future, but no buy-side respondent ticked this box. However, more buy-side respondents than sell-side respondents said that such investment is very likely. Overall, 8% of survey participants said that they will not invest in latency-reducing measures in the near future. When asked where in the trading business further investment in technology would be made, the areas that the sell-side and buy-side are focused on are, in order of prevalence, risk management, compliance, and back office and pre- and post-trade analytics equal third. The top answer on the sell-side is compliance, followed by pre- and post-trade analytics, risk management, and back office equal second, and on the buy-side it was risk management. No buy-side respondent expects investment in expanding blackbox broker/vendor algorithm. Despite the global economic downturn, no sell-side respondent expects to cut costs and reduce investment, but 10% of buy-side survey participants do. As for the reasons cited for using a hosting facility, cutting the cost of market access came out top, and reducing latency second, though this was the top reason on the buy-side, followed by lowering the cost of IT services, being as close to market data as possible, and disaster recovery equal third. With the HKEx’s data centre going live, 27% of respondents expressed the intention of moving there. However, a greater number of respondents said they will host with a data centre vendor.

Challenges Overall, the main challenges that respondents face are, ranked in order of importance, technology shortcomings, managing real-time risk, market data, volatility, exchange technology, liquidity, finding alpha, keeping algorithms current, finding qualified people, and lastly, keeping on top of regulation. Forty-two percent of the survey population thinks that “somewhat more” regulation is needed for algorithmic trading, but 31% consider the current regime satisfactory. The same number of respondents, 12%, think there should be “much more” regulation as think there should be “much less.” Examining responses in terms of sell-side/buy-side responses, the former is keener on greater regulation than the latter. Fifty eight percent of survey participants think Hong Kong needs a “true” alternative trading venue. Asia Etrader z Q1 2013 z www.asiaetrading.com

algo survey

India

ndia, like Korea and Taiwan, is what is termed an “ID Market” where investors are required to have a unique identifier when sending order to the market. For foreign investors who trade offshore, domestic players can see who is sending what and can get in front of these trades for their benefit. Despite this shortcoming, algorithmic trading in India, since SEBI allowed for direct market access (DMA) into that market, has exploded and is Asia’s most competitive and fragmented country in Asia at least from the domestic point of view. We had almost 24% of total respondents complete our India survey and the findings were interesting indeed. There were 45% buy-side and 55% sell-side where thirty-nine percent of total respondents work in technology and another 39% work in trading, followed by senior management at 18%, who all come from the buy side, and risk management at 3%. However, the majority of the buy-side survey population works in trading, while the majority of the sell-side population works in technology roles. Some senior management responses likely came from survey participants working in trading departments. From the sell-side 61% work for an investment bank, followed by respondents from agencies at 22%. A further 17% of sell-side respondents indicated they are from an introducing broker. The buy-side survey population was split between proprietary houses at 40%, hedge funds at 33%, individuals at 20% and family offices at 7%. Therefore, at least 73% of buy-side respondents actively manage money. Although probably also actively trading, respondents who identified themselves as individuals are unlikely to be using algorithms.

Algos The reasons cited for using algorithms to trade are, in order of prevalence of overall responses; improving trading performance, because there are too many orders to trade manually, pure profit and finding liquidity equal third, and minimising impact cost. Although 27% of overall respondents cited finding liquidity, those responses all came from the sell-side, suggesting liquidity is not a problem for buy-side respondents, which is because volumes are quite large for futures, and the bid/ask spreads on equities in India are the tightest in Asia. Aside from finding liquidity, the equal second most popular sell-side reason was because there are too many orders to trade manually, and the top reply was improving trade performance. Some three quarters of all respondents prefer to build their own algorithms, with 100% of sell-side respondents and 47% of buy-side participants taking this route, followed by 18% who build some and use broker or third party algorithms, and 6% who use third-party blackbox algorithms only. Turning to algorithm trading versus high touch trading, answers followed a similar pattern to algorithm trading versus direct market access with 69% of overall respondents trading within the 50% algo/50% high touch to 100% algo range. The most prevalent ratio on the buy-side was 50% algo/50% high touch trading, which 27% of responses reported using. On the sell-side, the top ratio was 40% algo/60% high touch trading. Looking to future developments, the algorithmic strategies respondents expect to employ in the near term, in order of prevalence of overall responses, are pre- and post-trade analytics (42%), list/basket trading and news sentiment equal second (33% each), implementation shortfall (21%) and VWAP and alpha-neutral strategies equal fourth (18% each). On the sell-side, respondents report that they expect to employ pre and post-trade analytics (39%), list/basket trading (33%), and VWAP, news sentiment,

market making and implementation shortfall (33% each). Meanwhile, the buy-side is focused on pre and post-trade analytics (47%) – which is interesting as in the previous question no one on the buy-side reported currently employing pre and post-trade analytics – news sentiment and delta neutral strategies equal second (40% each), and list/basket trading (33%). In terms of the degree of dependency on latency to execute trades, overall respondents were roughly split equally between “completely dependent,” “mostly dependent” and “somewhat dependent.” A few buy-side respondents reported that they are “not dependent at all” on latency, while the sell-side is more dependent on latency than the buy-side.

Latency On investment in reducing latency, overall, sell-side respondents are keener on spending on technology improvements than buy-side participants. Overall, 78% of respondents say they will certainly, or will very likely invest in reducing latency in the near term. Of respondents who said they expect to invest in reducing latency, collocation/proximity and boosting developers were the equal top preferred methods. On the buy-side, ticker plants, better hardware and connectivity improvement were the top three. Sell-side respondents expect to invest in a wider variety of methods of reducing than the buy-side.

Hosting Looking to hosting services, 48% of overall respondents host with the NSE, and 18% host at their own office, while hosting with a data centre and hosting at a broker office were equal third. On the buy-side, nobody hosts with the BSE, but 33% host with the NSE, and 27% with a data centre vendor, and another 27% at their own office, whereas on the sell-side, 61% of respondents host with the NSE and 11% with the BSE. Nobody on the sell-side uses broker algorithms or hosts with a data vendor. As to the reasons cited for using hosting facilities, overall respondents put reducing latency at the top, followed by “other” lowering the cost of market access, and lowering the cost of IT services, being close as close to market data as possible, and because of a lack of in-house IT resources. On the buy-side, 47% cite latency as the main reason for using a hosting facility, whereas on the sell-side, lowering the cost of market access and “other” are equal first. Nobody reported using a hosting facility because to enable disaster recovery, so as to be as close as possible to other brokers.

Challenges Overall, the main challenges that respondents face are, ranked in order of importance, exchange technology, finding alpha, finding qualified people and market data, but the buy-side finds exchange technology, finding alpha and finding qualified people more of a problem than the sell-side Exchange technology, was listed as the greatest challenge and liquidity as the smallest, with other responses were rather evenly distributed across; keeping on track of regulation, keeping algorithms current, managing realtime risk, market data, volatility and technological shortcomings. Just over half of all respondents think that algorithmic trading needs less regulation, but more of the sell-side survey participants were keener on less regulation than buy-side respondents, 33% of whom think regulation is “fine the way it is.” Fifty-two percent of respondents think that India needs dark pools, with more sell-side participants than buy-side respondents holding this view. Eighteen percent of those surveyed think that the country does not need darkpools, with more of the buy-side than sell-side holding this view. Asia Etrader z Q1 2013 z www.asiaetrading.com

algo survey

Japan

he JPX Group, consolidated from the Tokyo Stock Exchange and Osaka Securities Exchange, is now a reality in a market where fragmentation is the rule rather than the exception. Having fallen behind the curve as a global trading destination Japan is moving to correct this by reinventing itself and improving the quality of its market structure to become arguably the best in Asia. We hear how algorithmic trading is taking shape, with respondents who were split 42.3% buy-side and 57.7% sell-side Of the latter, 47% work at an investment bank, 33% are from agencies, 13% are commodity trading advisors and 7% are introducing brokers. The buy-side survey population was split between hedge funds, market makers, and proprietary houses at 30% each, traditional long-only firms at 20%, and individuals at 10%. Assets under management range from JPY0-100mn (US$0-1.15mn, 10% of respondents), JPY250mn500mn (US$2.86mn-5.73mn, 30% of respondents), JPY500mn-1bn (US$5.73mn-11.46mn, 40% of respondents), JPY1bn-5bn (US$11.46mn51.28mn, 10% of respondents), and JPY5bn (US$51.28mn) and over (10% of respondents Thirty-six percent of the survey population works in technology, split 30% buy-side and 40% sell-side, and 32% works in trading roles, followed by post-trade positions at 12%, risk management at 8% and compliance at 4%. The respondents working in risk management and post-trade roles are mainly made up of buy-side survey participants. Most respondents expect to increase their access to Japan’s markets in the near future – through exchange membership and brokers. The most popular route to increase access in the near future is through Chi-X Japan, a PTS, which 36% of respondents anticipate doing, while 20% expect to join rival PTS SBI Japannext. In terms of exchange membership, 20% of the survey population and an equal number of sell-side and buy-side respondents expect to become TOCOM members, and 16% of overall respondents anticipate becoming members of the merged OSE and TSE. However, nobody expects to increase access through becoming a TFX member. Turning to brokers, 24% of survey participants expect to add one, 16% to add two to five, and 8% to add multiple brokers. A fifth of respondents do not expect to increase access to the market at all.

Algos Most respondents (68%) prefer to build their own algorithms, with a similar number of buy-side and sell-side respondents taking this route. No one on the sell-side reports using only broker algorithms, but 10% of the survey population does. Double the number of sell-side respondents than buyside participants report using purely third party algorithms. Turning to who uses a mix of self-built and broker or third-party algorithms, nobody on the buy-side follows this approach, but 13% of the survey population does. Just under two-thirds of the survey population is confident that high touch trading will not disappear in the near future, while 28% thinks it might and 12% thinks it will. A greater number of sell-side respondents than buyside respondents think high touch trading will disappear. Turning to the challenges of list and basket trading, overall, respondents cite managing risk as the major obstacle, followed by, in order of prevalence, liquidity and good algorithms equal second, trading software, slippage, post-trade breaks, multi-market access and exchange throughput equal third. But nobody on the buy-side reports finding posttrade breaks, hedging or exchange throughput a challenge. However, they do cite liquidity, good algorithms, managing risk, and trading software as the top challenges. On the sell-side, the top challenges are, in order of prevalence, managing risk, exchange throughput, post-trade breaks multimarket access and slippage.

As to the asset classes that survey participants expect to start trading with algorithms in the near future, FX futures/options tops the list of overall respondents (48%), followed in order of preference by ETFs and single stock options (44% each), index futures/options (36%), commodity derivatives (32%), spot FX (24%) and OTC and cash equities equal sixth (20%).

Latency In terms of the dependency on latency to execute trading strategies, 56% of overall respondents said they are “mostly dependent,” with a similar number of buy-side and sell-side survey participants answering in the affirmative, while 12% said they are “completely dependent,” and 28% said they are “somewhat dependent.” Of respondents who said they expect to invest in reducing latency, collocation/proximity was the top overall answer, followed by connectivity improvement, increasing developers and ticker plants equal second. Sell-side respondents expect to invest in a wider variety of methods of reducing latency and to a greater degree than buy-side survey participants.

Hosting As for hosting services, the major trend is that half of buy-side respondents host at their office, compared with just 13% of sell-side survey participants. Ten percent of the buy-side group either use broker algos, host at the OSE, TOCOM or TSE data centre, or host with a data centre vendor. On the sellside, just over half of the survey population hosts at the TSE data centre, while 27% host at the OSE data centre, and 13% either host at TOCOM’s data centre or at their office.

Challenges Asked to rank main challenges they face, sell-side respondents put keeping on top of regulation at the head of their list, while the buy-side survey population put finding alpha first, and this was the penultimate entry for the former group. The other challenges that buy-side and sellside respondents rank highly are exchange technology, finding qualified people, managing real-time risk and keeping on top of regulation. The least problematic challenges are technology shortcomings and volatility. The majority of the sell-side survey population, 60%, think algorithmic trading needs “much,” or “somewhat” more regulation, twice the number of buy-side respondents that concur. Most buy-side survey participants think regulation is just fine the way it is.

Market structure When it came to their opinion on whether the TSE OSE merger will improve algorithmic trading in Japan, sell-side respondents turned out to be fence-sitters, with just over half responding “maybe.” Buy-side respondents were less equivocal, with 40% saying they don’t think it will lead to an improvement. Turning to whether they think Japan needs another PTS, sell-side respondents came out against the move, with just over half saying the country doesn’t need it, whereas a third of the buy-side population thinks there is a need, though a greater number, 40% think there is not. When it comes to what the survey population thinks Japan’s market needs most, top of the sell-side’s and buy-side’s wish-lists is competitive clearing, with the former group also putting lower fees at the top. And while the second answer on the buy-side is clear best execution rules, on the sell-side it came in at the bottom. Asia Etrader z Q1 2013 z www.asiaetrading.com

algo survey

Singapore

ingapore has more AUM than Hong Kong and has been leading the way in terms of cross border derivatives trading arbitrage. However, liquidity is a big challenge and trading costs are high. With a low corporate tax-rate and high standard of living what affect and shape has algorithmic trading taken in Singapore? The Asia Etrading algorithm survey shed some light on these and other pressing questions with 58% from the buy-side and 42% on the sell-side providing the colour. The buy-side survey population was split between hedge funds at 40%, individuals at 20% and proprietary houses, traditional long-only investors and market makers at 13% each. The majority of both the sell-side (55%) and buy-side (60%) respondents work in trading roles, with a further 15% of overall respondents working in technology roles, though that figure is comprised of buy-side respondents only, and 19% of respondents working in senior management roles, though that figure is comprised of sell-side respondents only. Regarding methods used to access the market, no respondent uses the ASEAN trading link, or goes through two to five brokers. Thirtyfive percent of overall respondents hold SGX clearing membership, split 64% sell-side and 13% buy-side. Twenty-three percent of overall respondents access the market through one broker, split 27% buy-side and 18% buy-side, and another 23% hold SGX trading membership, also split 27% buy-side and 18% buy-side. While nobody on the sell-side reports using multiple brokers to access the market, 33% of buy-side respondents do.

Algos Some 62% of overall respondents, split almost equally between buy-side and sell-side, report building their own algorithms, though just over a third of sell-side respondents say they use only their broker’s algorithms. Thirteen percent of the buy-side use third-party algorithms only, and another 13% build some and use broker or third-party algorithms, whereas nobody on the sell-side reports using these two approaches. In terms of the ratio of algorithm trading versus DMA, the main trend is that, overall, respondents rely more on the latter than the former, though all buy-side respondents trade within the 50% algo/50% DMA to 100% algo range, with a third relying solely on algorithmic trading. Of the sell-side respondents, nobody trades within the 70% algo/30% DMA to 100% algo range, and most trade within 60% algo/40% or 50% algo/50% DMA range. The five most popular algorithmic strategies according to overall responses are, in order of prevalence, VWAP (58%), which 100% of the sell-side survey population reports employing, implementation shortfall, and participation (38% of overall responses each), pegging (31%), and mean reversion (19%). Nobody on the sell-side reports using arbitrage, delta-neutral, market making, news sentiment, pairs trading or scalping strategies. The most popular sell-side strategies are, VWAP, implementation shortfall, participation and pegging, whereas on the buy-side it is VWAP, pegging, participation, implementation shortfall, and arbitrage.

Latency In terms of the degree of dependency on latency to execute trading strategies, 66% of overall respondents are “completely” or “mostly” dependent, and 23% are “not” dependent. On the sell-side, 100% of respondents are “mostly dependent,” but on the buy-side, 40% are “not dependent at all.” Of respondents who said they expect to invest in reducing latency, improving connectivity was the top overall response, but on the sell-side

co-location/proximity was the top response. Nobody reportedly intends to invest in better hardware to reduce latency, and while 13% of buy-side respondents intend to invest in ticker plants, nobody on the sell-side does, and though 18% of the latter group intends to invest in more developers, nobody on the buy-side does. The second highest overall response was investment in co-location/proximity. One respondent commented that latency is “largely dependent on broker systems.”

Hosting Turning to the reasons why respondents use a hosting facility, just under a third of the survey population says it’s because of the lower cost of IT services, and 15% say the do so for disaster recovery. Nobody reports using a hosting facility so they can be as close as possible to other brokers, or because they don’t have any in-house IT resources. The equal top sell-side reasons are disaster recovery and to lower the cost of market access, whereas on the buy-side nobody reports lowering the cost of market access as a reason, but 40% do so to lower the cost of IT services.

Challenges Asked to rank the challenges they face, respondents cited, in order from most problematic to least, finding alpha, managing real-time risk, finding qualified people, keeping algorithms current, exchange technology, volatility, liquidity, keeping on top of regulations, market data and technology shortcomings. The biggest disparities between sell-side and buy-side are exchange technology, which the latter finds more of a challenge, liquidity, which sell-side respondents find is much more of a problem than buy-side survey participants. Turning to regulation, 54% of overall respondents think algorithmic trading needs “much more” or “somewhat more,” while 35% think it needs “somewhat less” or “much less.” Twelve percent of the survey population thinks regulation is “fine the way it is.” Though 20% of buy-side respondents think regulation in Singapore is fine the way it is, no sell-side respondent reported agrees, and 18% think there should be much less regulation.

Market structure Asked to characterise the demise of Chi-east in Singapore, the most common response was that survey participants weren’t sure what to make of it. But a similar number said they would like to see more competition as reported thinking that Singapore is too small for fragmentation. Many more respondents think that Singapore needs a true alternative trading venue than don’t, though 15% of overall respondents are unsure. Regarding the ASEAN Trading Link, three quarters of respondents think it benefits algorithmic trading, a view shared by 93% of buy-side respondents and 54% of sell-side participants. Turning to what they think Singapore’s market structure needs the most, the equal top overall answers are liquidity, which are followed, in order of the number of affirmative responses, by lower fees and more alternative trading venues, equal second, better exchange technology, and smaller block sizes and brokers with API access. In terms of the difference between sell-side and buy-side opinions, many more respondents from the latter group think liquidity is needed than those form the former group, sell-side respondents put lower fees and tighter spreads higher up their list. No participants think that Singapore needs competitive clearing, and no sell-side respondent thinks better exchange technology or brokers with API access are needed. Asia Etrader z Q1 2013 z www.asiaetrading.com

country focus

The Philippines: Under the radar by Dan Barnes

Do the Philippine Stock Exchange’s planned reforms go far enough in providing an open market?

ccessing the Philippine equity market from overseas can be challenging; it is small, illiquid with a modest infrastructure. The Philippine Stock Exchange (PSE), under CEO Hans Sicat, is seeking to boost investment capital both domestically and from overseas. The market’s size and limited development make this an uphill task, however the prize of Philippine equities are a strong draw. Lito Vicencio, head of Philippine equities sales at broker Credit Suisse says, “Two things that are attracting foreign investors are strong macro and stable politics. The GDP growth rate combined with the low interest rate has been a good environment but previously politics has been a problem; now they’re working together there is a sense that there has been a structural change rather than a cyclical change.” A measure of the Philippine economy is in the strength of its banking system. The financial services industry is seeing continued lending, strong capital adequacy ratios and improving quality of assets when many developed markets are in trouble. “The total resources of the banking system rose by 4.8% year-on-year to P7.5 trillion as of end-March 2012, due largely to the growth in currency and deposits, while the non-performing loan ratio continued to fall,” says Alexandru Gomoiu, head of the Business Solution Group TCM APAC, at capital markets technology supplier, Misys. “The capital adequacy ratio (CAR) of over 16% in the banking system has remained above the targets for the Bangko Sentral ng Pilipinas (BSP) and the Bank for International Settlements’ (BIS) minimum requirements.” The trading environment is also moving in a positive direction, which is unusual in the current period of economic gloom, notes George Molina, Asian head of trading for emerging market buy-side specialists Franklin Templeton. “The Philippines is now around trading around US$160-170 million on any given day which is up 25-30% on last year according to Bloomberg. If you look at any other market in Asia, they are all down by anywhere from 5% to 20%, so this is the only market that has increased,” he says. At present, traditional buy-side firms like Franklin Templeton are able to trade effectively, if they establish connection with local buy-side firms, due to the level of transparency in the market. Molina says, “On Bloomberg you can see which broker traded what on any given day and it’s real-time information, so if we are looking for a block of stock we can look at over a month’s worth of analysis and see which broker is most active in a name then find liquidity routes into that broker. Still, only at US$170 million trade per day, we rely on our brokers to find blocks and there are quite a few blocks to be traded by global and domestic brokers that have good relationships with family shareholders.” To increase foreign participation the PSE will need to break down some of the barriers these firms face. Without the ability to trade in or out of positions easily, overseas investors other than specialists like Franklin Templeton may be reluctant to invest in the market. “The view from the ground is that the more we open the market, the more foreign investors will be involved,” Vicencio says. “Having foreign investors

“We rely on our brokers to find blocks and there are quite a few blocks to be traded by global and domestic brokers...” – George Molina, Asian head of trading, Franklin Templeton

can make a market more volatile as they can leave the country if they perceive greater value elsewhere. However increased local participation means that we are better prepared to handle movements in capital. Foreign participation in the market can help raise the bar on corporate governance and transparency. But we are not on the radar screen of many global investors in the same way as Malaysia and Indonesia. If we become associated with blocks like ASEAN, we will get more attention from overseas investors.” Sicat has outlined a plan that will create the conditions to support overseas institutions. The PSE plans to increase the number of companies it has listed; to grow the domestic retail investor base; and improve access for overseas firms. High-frequency trading (HFT) firms have been use by some exchanges, for example Chi-X Australia, to boost their trade volumes quickly, but James Rae, head of Advanced Execution Services (AES) Sales, Asia Pacific at Credit Suisse believes that the PSE has not got the right conditions to attract HFT order flow. “There are three general requirements for HFT trading: liquidity, tight spreads, and low frictional costs. In terms of sophisticated electronic participation, the market is so small that you won’t see a lot of highfrequency participation, if any at all, in the market. The average daily turnover is around US$120million per day; compare that to Singapore which is trading US$1.2 billion a day and Singapore is not seen as an opportunity for high-frequency participation as it doesn’t have the breadth or the depth. So you won’t see that type of participant in the Philippines. I think the greatest growth will come from access to foreign participation and retail growth on the back of that.”

On the path to progress The drive to grow initial public offerings (IPOs) is already succeeding; the exchange has predicted the value of IPOs will have reached approximately P200 billion in 2012, up from just over P100 billion in 2011. The PSE’s strategy for attracting traders will in part rely upon the sell-side says Peter Sherriff principal architect, Asia-Pacific, at order management system provider Charles River. Asia Etrader z Q1 2013 z www.asiaetrading.com

country focus

george molina, Asian head of trading, Franklin Templeton

“To date the sell-side offerings have been pretty vanilla, the trade volumes haven’t been there for them to invest too heavily in their offerings – something that’s borne out by the small number, approximately 10%, of trading participants that invested in online trading tools. Very few have looked for opportunities to reach out to the retail market,” he notes. “Increasing the number of listed companies has got to be key, then increasing education amongst young professionals to drive retail investment,” adds Molina. A significant change has taken place in the composition of the institutional investors trading on the PSE recently. Vicencio observes that six or seven years ago, the markets were dominated by foreign investors, who provided around 70-80% of average daily volume (ADV). A change has occurred so that in the last two years ago that mix has reversed with locals now accounting for about 60% to 70% of ADV. The PSE itself has noted the proportion of overseas traders fell to 38% in 2012 from 40% in 2011. Domestic traders are still predominantly institutional; the demographic of foreign traders has seen traditional institutional clients joined by private banks and increasingly buy-side firms from other ASEAN countries. “Before you would not expect Malaysian, Indonesian or Thai Pension funds to invest in the Philippines but now Malaysian pension funds have a big exposure to the Philippines,” says Vicencio. Buy-side block-trading platform Liquidnet launched in the Philippines on 5 September 2012, which was welcomed by asset managers. The PSE has extended its trading hours twice in the last year, moving from 09.30-12.00 to 09.30-13.00 on 3 October 2011 and then till 15.30 on 1 January 2012. These changes have had a material effect on trading. Franklin Templeton used to trade P5.5 billion average daily volume (ADV) between www.asiaetrading.com z Q1 2013 z Asia Etrader

james rae, head of Advanced Execution Services (AES) Sales, Asia Pacific at Credit Suisse

9.30-12.00, which increased to P6.2 billion ADV following the addition of one hour of trading and grew to P7.6 billion ADV after the existing trading hours were set, a 38% increase in average volume. It also intends to offer direct market access (DMA) to firms, although a timeframe for this has not been set.

Access all areas “The key to developing electronic trading in the Philippines will be access,” says Rae. “That may skew the makeup of the marketplace itself back toward more foreign participation. If you look at Indonesia which is a DMA market, day-to-day 60% of it is still foreign volume and 7% is domestic retail with the balance made up of domestic institutional participation. Efficient access is what will provide the initial bump in volume.” Sherriff concurs, observing that the hope of the market is that the introduction of DMA will drive growth in trading volumes and improve liquidity in the market, by coupling this with a push into online retail trading. However the plans must form part of a broader, more cohesive strategy argues Molina, or the willing not be matched by the flesh. “With all of that said, they can increase market liquidity but there is no point without the market infrastructure to be put in place to support it. I haven’t seen any sign of a recent system upgrade so are they prepared for an increase in liquidity? What is their capacity, can they trade 2-3x current volume? I’m pretty confident that they can but I’d like to know how far that capacity can go. So their infrastructure and human resources need to be upgraded,” he says, putting the case forward for further reforms. “What would be interesting now is whether, as many markets have done to increase liquidity, they launch ETFs. Security borrowing would also increase market capacity and they do not have that at the moment.”

post-trade

Over the border OTC rules by Dan Barnes

Differences in national rules and extraterritorially are playing havoc with Asia’s preparations to centrally clear OTC derivatives.

s national authorities seek to impose the G20’s principles of OTC derivatives trading upon their local markets, derivatives traders in Asia are facing a perfect storm of imperfect regulation. The Bank of International Settlements says that Asian over-the-counter (OTC) derivatives trading makes up only 8% of the US$647.8 trillion notional value outstanding globally, as identified by the International Swaps and Derivatives Association (ISDA) at the end of 2011, but regardless of size the business is of fundamental importance to Asian firms. Seven markets in the region have set out plans to mandate central clearing of OTC derivatives, with higher capital charges imposed on noncleared trades; Australia, China, Hong Kong, India, Japan, Singapore and South Korea. Each has a slightly different approach to transposing the G20 commitments into rules. “If you tried to impose the same rules on the OTC markets of Asia as are being imposed in the very developed markets of US and Europe, you might end up breaking the market, stopping the vital OTC functions from working,” explains Michael Syn, head of derivatives, SGX. “The other challenge is that as regulators build up their body of regulatory mandates they have to make sure that they are compatible, so that anyone who engages in cross border trading, which is a significantly sized business, isn’t caught by incompatible regulations on each side.” Of those countries in the region supporting the G20 principles, Australia, Hong Kong and Singapore have not committed to the use of a domestic central counterparty (CCP), opening the prospect for overseas CCPs to clear for one or more of these markets. “There is a big debate as to whether any pan-Asian propositions will work and where they will have to originate from,” says Keith Todd, executive chairman of derivatives trading system supplier Ffastfill. “It is unlikely that a CCP based in Singapore would prevail across Asia as that wouldn’t suit Hong Kong-based entities or China; rivalry in the region will probably inhibit any local CCP from succeeding across Asia, so the question is will one of the Western-based propositions come off?”

The hub of Singapore Several European CCPs are established in the region. LCH.Clearnet, the Anglo-French CCP which the London Stock Exchange (LSE) is expected to control of, provided clearing for the now defunct pan-Asian equity market Chi-East, a joint venture with Singapore Exchange (SGX). It has retained a relationship with SGX under plans for the Singapore market and LSE to allowing trading of their listed stocks on each other’s markets, which LCH would clear. Alternative exchange Chi-X Australia has also discussed using LCH. Clearnet as its clearer, rather than maintain its use of its rival exchange’s clearing house, ASX Clear; LCH has subsequently applied for a licence as a clearing and settlement facility. On 12 December LCH.Clearnet said its application will enable it to offer its OTC interest rate swap clearing to Australian banks. Four of Australia’s five domestic banks have submitted letters of intent to use LCH.Clearnet’s SwapClear to clear interest rate swaps. LCH.Clearnet says its SwapClear

“...swaps brokers needed to be registered as futures brokers with the MAS. As none of them were, the market ground to a halt...” – Tom James, chairman Navitas Resources

service currently clears A$3.9 trillion in Australian dollar denominated swaps, and the international members of the service have expressed strong support for SwapClear’s expansion in Australia. “We are allowed to connect clearing members out of Singapore but this applies to exchange traded derivatives only,” explains Heiner Seidel, spokesperson for Eurex Clearing. “We are still in discussion with the Hong Kong Monetary Authority and the other more relevant countries in the region although we have nothing to announce at present.” Both the Intercontinental (ICE) Exchange and CME operate clearing out of Singapore, while US post-trade giant The Depository Trust and Clearing Corporation has set up a trade reporting repository in the city-state. “ICE Clear Europe clears ICE’s Asian energy products, such as the ICE Fuel Oil 180 CST Singapore swap future, and is both a US Derivatives Clearing Organisation (DCO) and a UK Recognised Clearing House, which means that it can clear business for US and European firms,” says Jennifer Ilkiw, vice president, Asia Pacific Sales at IntercontinentalExchange. “This is important for markets such as iron ore in Asia as these firms can help bring additional liquidity to this market which traditionally is not very liquid, as well as the global oil and coal markets where these firms already play an important role.” SGX itself offers trading and clearing of equity derivatives for China, India, Japan and Singapore with strong markets in commodities of rubber, energy and steel, boasting 95% of the iron ore derivatives market. Syn says that the advantage that the US and European derivatives exchanges have, in their ability to offer margining across a greater range of products will be not be sufficient to dominate the market. “Banking and banking relationships are based on time-zones; if I’m an Asian bank my operational cycle, driven by my settlement of cash, is based in an Asian time-zone,” he says. “The regulatory regime I sit under, including bankruptcy and enforceability as well as OTC rules, matter too. So what will happen as the equilibrium outcome is that in each major timezone is that in each major time-zone – Europe, US and Asia with Singapore in the middle. Each one will probably end up with one or two dominant clearing houses, that would be our prediction.” Asia Etrader z Q1 2013 z www.asiaetrading.com

post-trade

michael syn, head of derivatives, sgx

Singing from the same hymn sheet For clearing brokers, membership of a single clearing house that allowed access to multiple markets in a region would be a real advantage. Margins could be netted off based on a greater proportion of a firm’s trading to and support costs would be lower. The potential of operating cross border is leading clearing houses and authorities to examine how the arrangement could work in the absence of a framework for recognition of overseas CCPs. But the issue of extraterritorial regulation is causing problems for firms who may be subject to rules based upon their dealing with a counterparty from another country, a point felt keenly in firms affected by the DoddFrank Act, as Singapore saw recently. Whereas in the US and Europe swaps dealers sit under the same regulator as a futures broker, in Singapore, which is a hub for OTC energy derivatives , swaps brokers are either not regulated at all or are subject to very light touch regulation, quite separately from futures brokers. “Around 70-80% of our focus in Singapore is on energy products, whether coal, oil, liquid gas or otherwise,” says Ilkiw. “Up until October 12 this year we cleared OTC energy swaps and then, because market participants sought the regulatory certainty of futures amid the continued evolution of new swap rules we took all of our cleared energy swaps and converted them into futures contracts. The key difference is that they are now regulated as futures.” The effect for brokers clearing trades with US counterparts through ICE Clear was two-fold: firstly they would now not be required to establish trade reporting arrangements, as trade reporting arrangements for futures already exist; secondly firms trading large enough sizes of contracts to have been identified as either ‘swap dealers’ or ‘major swap participants’ and subjected to operational requirements under Dodd-Frank were now free from those obligations. www.asiaetrading.com z Q1 2013 z Asia Etrader

jennifer llkiw, vice president, asia pacific sales, intercontinentalexchange

“The ICE pushed through hundreds of energy contracts with the FSA as new swap futures contracts in order to avoid some of the complications of reporting transactions that the CFTC requires if trading with US counterparties,” says Tom James, chairman and co-founder of consultancy Navitas Resources. “Futures reporting is done via the exchange so there is no individual reporting required. But the problem then is that the swaps brokers needed to be registered as futures brokers with the MAS. As none of them were, the market ground to a halt.”

Out of the frying pan into the fire The MAS has granted an exemption to the brokers, who have to apply for a capital markets services licence, which can be quite difficult to get, prior to 31 December 2012. Sources note that it can take between one to two years on average to be granted. But Dodd-Frank goes further; clearing organisations have to register with the CFTC under the US rules as a derivatives clearing organisation (DCO) or US firms cannot trade on it. SGX has applied to be registered as a DCO; sources have claimed orders are being routed to ICE or CME to clear contracts using their futures products as an alternative, and the CME is reported to have waived fees on several ferrous metals contracts for a six-month period. This sort of disruption to business is challenging for firms to manage. The risk of penalising them by adding cost and complexity to the process of hedging positions is significant. Having moved from swaps to futures for many contracts, the US exchanges have cut back on post-trade expenses for some traders but added complications for others. Where markets suddenly lose liquidity or become too expensive, derivatives may start to lose their lustre. “What is the global risk strength of the market about? It is insurance,” says Todd. “If the cost of insurance is too much, then you don’t insure.”

opinion poll

Should orders have a mandatory resting period?

s Asian regulators embrace more competitive and open capital markets they often look to the West for best practices to address exploitative behaviour amongst participants. The technology-driven high-frequency trader (HFT) as often reported by an uninformed media is portrayed as a predator and detrimental to the evolving market structure now accelerating in Asia. One of the ways poorly resourced and misinformed regulatory bodies are trying to stifle HFT players is the introduction of a minimum resting period for orders sent to a central order book. In the MiFID II review a 500 millisecond resting time for open orders has been approved but does such an arbitrary amount of time make sense? We conducted a poll at the Asia Etrading website asking; “Should orders have a mandatory resting period?”, replacing the roundly condemned 500 millisecond period for a slightly more business friendly 500 microseconds. As you can see by the results

only one third of respondents thought there should be a mandatory resting period with 20% saying 500 microseconds made sense. We suspect that they were influenced by media reports around the MiFID review and hence the higher number that voted. An almost equal number of respondents 20.69% were Unsure and needing more information and 10.34% saying Maybe couldn’t decide if mandatory resting periods for orders made sense. Fair enough. More research and study of the ramifications of such a broad market structure change is prudent. Lastly, just over one third said they should never have a mandatory resting period. We are inclined to agree with this as it seems regulators are putting a band aid over their own problem of not having the tools to monitor the market, rather than finding a cure. Certainly HFT is capable of diminishing market quality and no doubt that there are a few bad apples doing just that. We do not think a blanket and arbitrary resting period addresses

predatory behaviour and poor liquidity but only places another tax on electronic trading participants and those adding value to market structure. How much did Bernie Madoff cost the industry? I don’t believe he even knew what an algo was yet he got away with it.

Asia Etrader z Q1 2013 z www.asiaetrading.com

opinion poll

Will 2013 be a better year for Asia’s electronic trading industry?

ithout doubt 2012 was another tough year for electronic trading. Anaemic volumes in low volatility markets, undertowed by the global economy, made it a challenging year that saw headcounts in the front office continue to decline. Will 2013 be a better year for Asia’s electronic trading industry? We asked the industry with a poll at our website to see what they thought. With a whopping 42.86% voting ‘No, not really’ electronic trading in Asia (and certainly globally) looks to continue to grind forward this year. Another 9.52% said the status quo will be maintained with much the same outlook this year as last. There were 4.76% in the doomsayer camp proffering market conditions

would be much worse. We do not know how much worse it can get than what we are seeing at desks across Asia these days. This is just not a sell-side phenomenon. Buy-side firms are reducing heads on the trading desk too and asking brokers to do more of the heavy lifting within the trading process. Perhaps this shift of labour to electronic trading desks is what led those who voted ‘Yes, somewhat better’ at 38.19% and the overly optimistic 4.76% who believe next year will be much better. We are inclined to view 2013 as year in which the industry should turn around, barring any regulatory time bombs blowing up confidence. On the macro level it looks like Europe is going to survive its crisis and offer some measure of stability, although they

are not out of the woods yet. The US has the Dow approaching all-time highs, job growth is moving in the right direction and domestic debt levels are declining. If the US returns to consumption and China can continue to grow a middle class of consumer then 2013 does look promising; that is the light at the end of the tunnel.

Visit: http://www.AsiaEtrading.com/opinion-polls/ Vote on the latest Opinion Poll

www.asiaetrading.com z Q1 2013 z Asia Etrader

word on the street

WORD

on the street Henry Young, CEO, TS-Associates

xchanges will start planning for the transmission of nanosecond precision GPS synchronised time stamps with order response messages. Coupled with real time latency information, this will facilitate a full audit trail of events to be recreated on demand, ordered not by absolute wall clock time, but correctly ordered in terms of event causality. The distinction is subtle but profound.

Marion Lang, Global Head of Sales, OANDA

e see strong uptake in mobile use. Mobile trading is particularly well-suited to the global nature of currency trading. As traders grow more comfortable with trading on mobile devices we expect this trend to grow into a full-blown phenomenon where the trading desktop experience is available on the handset.

Michael Drake, Executive Director, Goldman Sachs Electronic Trading

n 2013 I expect a breakout year for lit ATS’s in the region. ATS’s will post new volume records – either as absolute values traded or percentages of total volume – and this will fuel buy-side demand for SOR implementation across salestrading and electronic desks. As more trading participants become enabled, a virtuous cycle will be created, feeding back into ATS growth. I suspect this will take place regardless of whether or not ‘best ex’ policies are in place (explicit or implicit), though where ‘best ex’ is in play, I think we’ll see more rapid adoption.

Josephine Kim, Director, Asia Pacific Execution Sales, Bank of America Merrill Lynch

or 2013, we anticipate a greater uptake of electronic trading and an increased market complexity. Although 2012 volumes were down, electronic flows increased and this will continue as clients view electronic trading as their preferred execution method, in the pursuit of cost efficiency and alpha discovery. Greater complexity, in terms of markets and regulation is expected. More regulatory control on electronic trading while exchanges will thrive to stay competitive. As a result, technology upgrades and exchange consolidation are expected.

A Regional Exchange Executive

assive assets under management will continue to grow in Asia and ETF AUM across the region will increase by at least 25%. Market volumes will grow in kind and will regularly exceed 5% of ADT in Hong Kong (up from current levels of 3%). There will be a shift towards fully replicated ETFs vs. Synthetics with RQFII ETFs accessing the China A-share market becoming the product of choice for retail investors. Greater China indexes will be introduced with ETFs on those indexes providing a basket of stocks spanning the Shanghai, Shenzhen and Hong Kong markets.

Asia Etrader z Q1 2013 z www.asiaetrading.com

word on the street

What are your predictions for 2013? George Molina, Head of Asian trading, Franklin Templeton Investments

ext year more quant-based tools and systems will be used to help the process, from information, to analysis to implementation. Buy-side communities will develop so the buy-side have a greater say on who participates in their pools of liquidity. Indicators of interest will become a greater source of liquidity seeking tools.

Lito Vicencio, head of equities sales at Credit Suisse

ocal funds continue to be heavily biased towards fixed income but with rates dropping and likely to stay low for long, we anticipate a switch out of fixed income into equities. [In 2013] there will be an upgrade in the Philippines credit rating to investment grade – to some extent, this is already being reflected in the prices of our bonds. [There will be an] increase in the Philippines weighting in terms of the MSCI – with the market becoming more liquid, it is not unreasonable to expect that the country’s weighting in the MSCI Asia-Pac Index will be increased.

Michael Syn, Head of Derivatives, Sinagpore Exchange

hree of the worldís ten safest banks are from AAA-rated Singapore; two of the world’s eight remaining AAA-rated listed companies are on SGX. My prediction is that there will be a widespread realisation that [the Singapore] model consistently outperforms by having high regulatory standards.

Greg Lee, Director, Head of Autobahn Equity Asia Deutsche Bank Securities #1: The HKEX begins to publish ATS traded volumes to bring the market some transparency to alternative venue trading that is reported to the exchange. #2: ETF traded volumes in Asia grow dramatically as both retail and institutional investors increase their use of them. #3: Alternative trading venues start to appear in new markets across Asia.

Lee Porter, Liquidnet’s Head of Asia Pacific

iltering effect of ASIC controls – The impact of ASICís new regulatory controls on algorithmic and dark trading awaits to be seen – depending on how the changes are received and implemented in Australia, some of the elements of these changes will start to filter to other markets in the Asia Pacific region. Hot markets – Emerging Asian markets will continue to prove attractive for the industry as we head into 2013, due to their high growth potential and factors such as rising domestic demand, cuts in interest rates and ongoing government reform happen.

www.asiaetrading.com z Q1 2013 z Asia Etrader

Technology

HKEx launches Hong Kong trading ‘ecosystem’ New data centre boasts high performance for Hong Kong, but its competitive advantage is questioned.

ince early 2010 Hong Kong Exchanges and Clearing (HKEx) has been revamping its technology systems, but whether this constitutes a leap forward, or just a catch-up with its peers is still being debated. The market and infrastructure operator certainly expects the developments to fuel fresh growth through lower latency, deliver better data capacity and enhanced market data platforms. HKEx’s recent HK$3 billion project – dubbed Orion – is a critical milestone that is set to shape Hong Kong’s financial markets, says Ryan Wuebbels, head of relationship management at HKEx. In December, the much anticipated hosting services went live, and according to HKEx it

delivers the highest capacity hosting services of any exchange in Asia Pacific. The services allow participants such as brokers to access the HKEx market for electronic trading through a secure, in-building low-latency network. The HKEx’s data centre is sited at Tsueng Kwan O. It has over 1,200 racks and the tier 4 data centre is one of the largest in the city. “This new data centre gives us the opportunity to combine all our enterprise systems under one roof,” Wuebbels says. The data centre project, including new infrastructure and platforms, has been underway for two years. HKEx is clear about what it wants to achieve with the new project – more growth by attracting greater investor participation. “In order to be

successful in business we need to have the technical capability, and that’s why we made this investment. Space, power and connectivity is what we’ve focused on,” Wuebbels says. Already, HKEx has strengthened its securities trading and market data with the update to SDNet, the network infrastructure it uses for trading, clearing and settlement, and market data dissemination across securities and derivatives. With the hosting services going live in (December), investors will also enjoy new market data services in 2013 with other platforms on the cards. The derivatives market platform is planned to come online in the second quarter of 2013 followed by the securities and settlement systems in the fourth quarter.

Asia Etrader z Q1 2013 z www.asiaetrading.com

technology

All of this computing power is aimed at taking the HKEx to the cutting edge of technological conformity. HKEx is a significant trading post for global investors, functioning as a significant exchange in its own right and as a gateway to China the potential of the exchange cannot be overstated. Still, many industry observers have served up doubts on whether the new multibillion data centre, which Wuebbels likes to call an “ecosystem,” can make much of a difference for Hong Kong’s exchange in terms of raising its competitive edge vis a vis regional rivals such as those in Tokyo, Singapore or Sydney. Interestingly, several senior officials of rival exchanges and other “neutral” brokerage houses in Asia were virtually unanimous in their views that Hong Kong’s technological transformation will change little in terms of boosting trading flows into the city. All these officials and senior traders were reluctant to go on record, citing the sensitivity of the subject and negotiating positions of HKEx and other exchanges. A senior official close to the Tokyo Stock Exchange explained that since the TSE is still the “most liquid market outside of the US,” he does not expect any notable shifts in fund flows to Hong Kong from Tokyo. He pointed

to the absence of stamp duty in TSE as an advantage over HKEx, and adds that “the most listed cash products in Asia, the only liquid fixed income derivative listed in Asia, state-of-the-art collocation facility, low trading fees and night trading for derivatives products” make Tokyo very attractive. A source at the Singapore Exchange (SGX) was slightly more circumspect about HKEx’s tech initiative, saying the SGX has to remain ever vigilant about losing market share to rival exchanges. Still, the source was hard pressed to outline any key threats to business resulting from Hong Kong’s multibillion dollar tech revamp; “I think their (HKEx) efforts to grow their business will come up against stiff competition from other bourses, including the SGX, TSE and ASX. We are confident that investors will look to diversify their investments, and while China is a hot market, there are good reasons not to be over-reliant on one big marketplace, and that will drive investors to places other than Hong Kong for diversity of product and better returns,” the source said. HKEx’s Wuebbels, however, is in no doubt that the Orion initiative creates a unique environment to facilitate a one-stop-shop for global investors keen to trade across all asset classes. He was quick to emphasise the importance of China, the global hot money flows, and the HKEx’s own performance this year. As of the middle of November, the HKEx rose 18%, while China’s Shanghai Composite lost 4.3%; the Dow Jones Industrial Average, the Nikkei and Kospi each gained 6%, and Europe advanced 4%. (Note to eds: may be we can get more recent numbers for this? Apols don’t have ready access to numbers) “You can see the HKEx has performed extremely well and people are realising that,” Wuebbels says.“This data centre becomes the technical infrastructure to facilitate the movement of capital into and out of China.” HKEx has many other strengths; Wuebbels made the point that many global investors wanted to get their piece of action on the internationalisation of the yuan (renminbi). By improving its technical infrastructure to the highest standards, HKEx hopes to facilitate the trading of the yuan. Another big step for the HKEx was the $2.2 billion acquisition earlier this year of the London Metal Exchange, putting it in position to attract more customers from China where demand for commodity hedging is forecast to grow rapidly because of the country’s huge appetite for metals and other commodities. On the question of attracting investors to the one-stop-shop, Wuebbels explains, “Different asset managers have different trading strategies

www.asiaetrading.com z Q1 2013 z Asia Etrader

and have different requirements, and in the past those system providers were all over the place, such as Hong Kong, Singapore etc; we are trying to bring a lot of these people, the more important ones, all under one roof. So now you can cross connect more and more service providers, technology or connectivity providers. The ecosystem is meant to be a multifaceted offering, so you can drive down costs.” A Hong Kong-based investment banker at a US bank concurs with Wuebbels that having an ecosystem-type set up will benefit market participants, but he was not very sure if business and growth will become “transformative” for HKEx as a result of the high tech facility. “Hong Kong should have had this [technology] upgrade completed a few years ago; they had been putting this off for various reasons, and the fact that they’ve now caught up with others is a good thing though not necessarily transformative in a business sense,” he adds. The investment banker acknowledged that low latency trade is important, though he added that high-frequency trading won’t be taking off in Hong Kong any time soon. Wuebbels wasn’t concerned about HFT, saying it was never the focus of the new data centre. “There’s still the stamp duty, we trade in blocks meaning we don’t have single share trading and our spreads vary from one to thousand basis points, so it’s not really an environment that’s conducive to those type of trading strategies,” he says. “What you will instead find is that if you are in our data centre, no matter where you are, whether in the cabinet on the second floor, or in the cabinet on the third floor and our trading system is actually on the fourth floor, you will have the same latency.” The new facilities’ systems have already increased the operation’s trading capacity 10-fold to 30,000 orders per second, with the capability to move up to 50,000 per second. It has also achieved a 90% reduction in latency for executing a trade (from an order entry to completion), which is now at 2.6 milliseconds from around 300 milliseconds previously. On the TSE, this number is around 2 to 2.5 milliseconds for cash, and in Singapore it is 2.5 to just under 3 milliseconds. One senior institutional trader at a Hong Kong brokerage said that for many rival bourses in the region, HKEx’s strategic location as a gateway to China will remain their [rival exchanges] biggest threat to business. “I think other rival exchanges realise that; the technical upgrade is a natural evolution in Hong Kong, the key is that with a giant market at its door step HKEx has a lot to gain from being able to service the small and big investor.”

the back pages

Dates Date

Event

Where

Type

January 23-24

iFXEXPO

Macau

Conference

January 29

Asia Etrading Algo Survey 2012

Web

Webcast

Feburary 26

The Complinace Conundrum

Web

Webcast

Feburary 26-27

Clearing, Settlement & Custody Asia Forum

Singapore

Conference

Feburary 27

FISD Southeast Asia (SEA)

Singapore

Forum

Feburary 27

Japan Int’l Banking & Securities Systems Forum

Tokyo

Conference

March 5

FISD Tokyo

Tokyo

Forum

March 14

Collateral Management

Web

Webcast

March 20-21

20th FOW Derivatives World Asia Expo 2013

Hong Kong

Conference

March 21

TradeTech Australia

Sydney

Conference

April 23

TradeTech Australia

Shanghai

Conference

May 2

Asia Etrading Roadshow

New York

Forum

May 7

Asia Etrading Roadshow

London

Forum

Date Country Holiday

14-Jan Japan 24-Jan Indonesia 24-Jan Malaysia 24-Jan Pakistan 25-Jan India 26-Jan India 28-Jan Australia 06-Feb New Zealand 09-Feb China 09-Feb Korea 09-Feb Taiwan 10-Feb China 10-Feb Indonesia 10-Feb Korea 10-Feb Malaysia 10-Feb Philippines 10-Feb Singapore 10-Feb Taiwan 10-Feb Vietnam 11-Feb China 11-Feb Hong Kong 11-Feb Japan 11-Feb Korea 11-Feb Malaysia 11-Feb Singapore 11-Feb Taiwan 11-Feb Vietnam 12-Feb China 12-Feb Hong Kong 12-Feb Taiwan 12-Feb Vietnam 13-Feb China 13-Feb Hong Kong 13-Feb Taiwan 13-Feb Vietnam 14-Feb China 14-Feb Vietnam 15-Feb China 15-Feb Vietnam 16-Feb China 17-Feb China

24-Feb 25-Feb 28-Feb

Coming-of-Age Day The Prophet Mohammad’s Birthday The Prophet Mohammad’s Birthday Eid Milad un-Nabi Id-E-Milad Republic Day Australia Day observed Waitangi Day Chinese New Year Seollal Holiday – Day 1 Chinese New Year Chinese New Year Chinese New Year Seollal Holiday – Day 2 Chinese New Year Day 1 Chinese New Year Chinese New Year Chinese New Year Chinese New Year Chinese New Year The Second Day of Lunar New Year National Foundation Day Seollal Holiday – Day 3 Chinese New Year Day 2 Chinese New Year Day 2 Chinese New Year Chinese New Year Chinese New Year The Third Day of Lunar New Year Chinese New Year Chinese New Year Chinese New Year The Fourth Day of Lunar New Year Chinese New Year Chinese New Year Chinese New Year Chinese New Year Chinese New Year Chinese New Year Chinese New Year Chinese New Year

Taiwan Philippines Taiwan

Lantern Festival People Power Day Peace Memorial Day

01-Mar Korea 10-Mar India 20-Mar Japan 23-Mar Pakistan 27-Mar India 28-Mar Philippines 29-Mar Australia 29-Mar Hong Kong 29-Mar India 29-Mar Indonesia 29-Mar New Zealand 29-Mar Philippines 29-Mar Singapore 30-Mar Australia 30-Mar Hong Kong 31-Mar Australia 01-Apr Australia 01-Apr Hong Kong 01-Apr New Zealand 04-Apr China 04-Apr Hong Kong 04-Apr Taiwan 05-Apr Taiwan 06-Apr Thailand 08-Apr Thailand 09-Apr Philippines 13-Apr Thailand 14-Apr Thailand 15-Apr Thailand

March 1st Movement Maha Shivratri Vernal Equinox Day Pakistan Day Holi Maundy Thursday Good Friday Good Friday Good Friday Good Friday Good Friday Good Friday Good Friday Easter Saturday The Day Following Good Friday Easter Day Easter Monday Easter Monday Easter Monday Qing Ming Jie Ching Ming Festival Childrens Day Tomb Sweeping Day Chakri Memorial Day Chakri Day - Observed Day of Valor Songkran Songkran Songkran

16-Apr 17-Apr 19-Apr 24-Apr 25-Apr 25-Apr 29-Apr 30-Apr

Songkran – Observed Songkran - Observed Hung King’s Commemoration Mahavir Jayanthi Anzac Day ANSAC Day Showa Day Victory/Independence Day

Thailand Thailand Vietnam India Australia New Zealand Japan Vietnam

Asia Etrader z Q1 2013 z www.asiaetrading.com

Directory AlphaFlash is the low latency algo news feed developed by Deutsche Bˆrse and its subsidiary Need to Know News. The feed provides machine-readable macroeconomic indicators, treasury auction results, corporate news and Fitch ratings for integration into trading algorithms. Direct connectivity is available in data centers across the globe. AlphaFlash also feeds into the new and revolutionary trading application AlphaFlash Trader that allows users of popular execution platforms to automate trading based on economic news. By employing AlphaFlash Trader, orders can be entered into the market automatically at the release of an economic event. Both AlphaFlash and AlphaFlash Trader are available for a 30-day free trial. www.alphaflash.com www.alphaflashtrader.com E-mail: alphaflash@ntkn.com

Asia eHeads is the leading career portal for Asia’s electronic trading industry. The websites specialist focus makes it an ideal venue for relevant high quality positions across Asia. There are no agents or headhunters to worry about and you can submit your placement enquiries directly to the hiring manager anonymously. The company is based in Hong Kong in one of the leading global financail centers on the planet. Please visit http://asiaeheads.com/support@asiaeheads @asiaeheads or scan the QR code BofA Merrill Lynch, recently voted Asiaís Best Brokerage and Asiaís Best Sales in the 2012 Institutional Investor All-Asia surveys, offers a full suite of premier multi-asset execution services globally backed by the bankís global resources and expertise. The Global Execution Services (GES) team is made up of experienced market experts who partner with clients to ensure all aspects of best execution. Key services include comprehensive execution consulting, state of art algorithmic trading technologies, quantitative analytics and research. GES a key business partner to BofAMLís institutional clients. AsiaPacAlgo@baml.com Bloomberg: MSG MLAPDSA<GO> Hong Kong +852 2161 7550 Mumbai +91 22 6632 8718 Singapore +65 6678 0205 Sydney +61 2 9226 5108 Tokyo +81 3 6225 8398 Equinix, Inc. (Nasdaq: EQIX) connects businesses with partners and customers around the world through a global platform of high performance data centers, containing dynamic ecosystems and the broadest choice of networks. We provide a neutral meeting place for the worldís leading financial market participants, including trading venues, buy- and sell-side firms, market data providers, technology providers and financial networks. These customers locate servers and infrastructure within Equinix data centers to support mission-critical financial services applications with highly reliable, lowlatency connectivity covering multiple asset classes including foreign exchange, cash equities and derivatives. Learn more at: www.equinix.com/industries/financial-exchange/ http://blog.equinix.com @equinix

www.asiaetrading.com z Q1 2013 z Asia Etrader

the back pages

Fidessa is a global business with scale, resilience, ambition and expertise. We’ve delivered around 30% compound growth since our stock market listing in 1997 and we’re recognised as the thought leader in our space. We set the benchmark with our unrivalled set of mission-critical products and services and, uniquely, serve both the buy-side and sell-side communities. Ongoing investment in our leadingedge, integrated solutions ensures Fidessa remains the industry’s number one choice. Tel: +852 2500 9500 Email: ap.info@fidessa.com www.Fidessa.com @fidessa Founded in 1996, FlexTrade Systems Inc. is the industry pioneer in broker-neutral algorithmic trading platforms for equities, foreign exchange, options and futures. FlexTRADER, our flagship platform, is widely viewed as unique in the industry for its high performance and multi-asset capability. We also offer Mottai, a web-based front-end trading solution combining market data and leading edge risk management and trading tools for brokers. With offices in Asia, North America and Europe, FlexTrade has a worldwide client base spanning more than 150 buy- and sell-side firms, including many of the largest investment banks, hedge funds, asset managers, commodity trading advisors and institutional brokers. www.flextrade.com T: +65 6829 2569 sales_asia@flextrade.com @flextrade SunGard’s solutions for capital markets help banks, broker/dealers, futures commission merchants and other financial institutions improve the efficiency, transparency and control of their trading and processing. From market connectivity, trade execution and securities financing to accounting, data management and tax reporting, our solutions provide cross-asset support for the entire trade lifecycle. We help our customers increase efficiency, make more informed decisions, improve their use of capital and manage risk more effectively. Asia contact info: Hong Kong: +852 3719 0800 Singapore: +65 6308 8000 cm.asia@sungard.com www.sungard.com/capitalmarkets @SunGardCM

Would you like to see your company listed here? Contact: support@asiaetrading.com for details.

Social Media Social Media in Asia in 2013

here were some eye opening innovations is store for attendees at Digital Media Asia 2012, which is Asia’s largest conference on new media, held November 27 to 29, 2012 in Kuala Lumpur, Malaysia. The conference gathered together over 350 attendees representing media companies and suppliers from thirty two different Asian countries. Twenty or more notable speakers explored the latest trends in social media, content monetization, mobile and tablet publishing. Speakers included Joe Nguyen Senior Vice President, Asia Pacific ComScore, Singapore and Kimmo Kiviluoto CEO and Co-founder of Enreach Solutions) who shared the latest numbers as they charted some surprising trends and explained what they believe is happening with social media in Asia in 2013. Asia leads the way for mobile usage among social media users and is proving to be a hotbed of innovation. There are a number of Asian companies now emerging as global leaders in social media and according to an Oct 2012 Grayling PULSE survey almost 30% of CEOs and senior management, in Asia, are themselves blogging or tweeting. This is higher than the global average of 22% which contradicts the assumption that Asian businesses in general are conservative. According to current Social Bakers data Facebook has over 279 million users in Asia right now, which is just over 6% market penetration. The world’s largest social networking site is growing the fastest in Asia, at the rate of ten million new users per month, and right now that makes this continent the fourth largest user base. Asia is the fastest growing region of Facebook users; the continent is now responsible for a full quarter of all visits to the world’s largest social network. Generally speaking, it was acknowledged by all attendees that internet access is still an issue for many Asian countries, and this fact is reflected in some of these low per capital usage statistics. All things considered, these numbers do show, it continues to thrive in developing

@asiaetrading Tweet cloud Top Tweets 2012 continents like Asia, and clearly has the potential to grow even further in this part of the world. Buddy Media recently reported that nearly seventy five percent of Asian marketers engage in social media marketing and although Facebook is still the platform of choice for brands around the region, with almost 9 in 10 Asian companies giving it a ‘Like’, they also report that over sixty percent of the Facebook friendly companies also have an expanding presence on Twitter. Asian Social Media by the numbers: Simon Kemp of We Are Social shares some great information in this Slideshare document published in October 2012: •T here are now well over 1 billion internet users around Asia; •A t least 811 million of these people use social media; •5 0% of the world’s social media users are in Asia;

• More than 10 million new people in Asia join Facebook every month; • Asia is home to more than 3 billion mobile subscriptions. • The number of internet users in the region has grown by almost 14%; • Users of the top social network in each country around Asia have increased by more than 8%; • Mobile subscriptions have seen growth of more than 12%. These numbers are significantly higher than what was reported at the same conference in Nov 2011, but its not just the growth in users that has people excited, its the diversity of content and the innovation in mobile delivery and subscription models that is more impressive. Asia consumers spend almost two million years of combined time on the internet every month, watching almost forty five billion online videos which totals half a trillion videos every year.

Follow Asia Etrading on Twitter @asiaetrading Asia Etrading Fan Page is now on Facebook – www.facebook.com/AsiaEtrading