AsiaEtrader Issue 9 | Volume 1
Jan-Feb 2014
The Electronic Trading Resource for Asia
ETF Roundtable Shanghai Free-Trade Zone Short selling rules in Japan BSE technology arms race
2013 Year in Review Why SET stands out in ASEAN
LEADER
AsiaEtrader Issue 9 | Volume 1
Jan-Feb 2014
2013 Year in Review
The Electronic Trading Resource for Asia
ETF Roundtable Shanghai Free-Trade Zone Short selling rules in Japan BSE technology arms race
It was a year of consolidation, derivatives and regulations wasn’t it? Yes, Abenomics did put some kick into Japan’s cash market but it would be safe to characterize this as a rising tide rather than a Tsunami. The JPX group saw its technology 2013 Year in Review Why SET stands out in ASEAN
platforms merge, the LME became part of the HKEx while HKMEx folded
CREDITS
and ICE a small player in Asia’s energy
Editor-in-Chief Stephen Edge steve@asiaetrading.com
market deftly bought SMX. The derivatives space saw probably
Managing Editor Dan Barnes dan@icorp.co.uk
the biggest change with new contracts, old one’s growing and OTC, though
Contributing Writers Stephen Price steveprice@ymail.com
should be interesting next year.
Lynn Strongindodds strongindodds@aol.com
not driven by interest rates but commodities, coming to the fore. Clearing And we are all worn out from the regulatory burden particularly at the global and extra-territorial level but regional changes brought on by the
Gurdip Singh gurdips@starhub.net.sg
maturing markets were also on the industry’s plate. ASIC tweaked its MIR,
Cover Design Nadia P. nad3e9@gmail.com
HK SFC is bringing changes to algo use, Korea and Singapore are also
Magazine Design The Magazine Production Company, Adur Business Centre, Little High Street, Shoreham-by-Sea, West Sussex, BN43 5EG Printer Century View Printing Limited Units B3, B4 & A1; 10/F Ko Fai Industrial Building 7 Ko Fai Road Yau Tong Kowloon Hong Kong
moving the ball for the industry. It was another tough year overall however. The cost of doing business is getting to be too high and the industry really needs some relief from its shackles. We hope 2014 will finally be the year that it happens and we look forward to bringing it to you.
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Wild Wild Web Ltd. Suite 508 5F Stag Building 148 Queen’s Road Central Hong Kong www.asiaetrading.com ©2014
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CONTENTS
Contents IN THE ZONE
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Our quarterly round-up of industry news and developments across Asia Page 4
COVER STORIES 2013 Year in Review – We look back at the developments around Asia of its electronic trading industry in 2013. Page 6
Thailand takes ASEAN trading mantle – The significant reforms of the
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Thai exchange are surpassing growth elsewhere. Page 10
DERIVATIVES The battle to be commodity king of Asia – Dominance in the Asian commodities market is far from clear. Page 14
Asia Futures Trading FY 2013 Recap – See derivatives rankings at Asia exchanges
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for 2013. Page 18
BUY SIDE Asia’s Evolving ETF Landscape – Asia Etrading held its 5th forum in Hong Kong to discuss the regions’ growing ETF industry. Page 20
24 REGULATION One country, three systems – The newly inaugurated Shanghai free trade zone is a hot bed of financial policy reform. Page 24
WHO’S WHO Asia Etrader spoke with Hans Sicat CEO of the Philippine Stock Exchange. Page 26
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CONTENTS
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OPINION Are you ready for the HK SFC’s new electronic trading requirements? What asset classes will you be focusing on in 2014? Page 30
Sandeep Tyagi looks at India as an attractive destination for global traders. Page 32
WORD ON THE STEET “What is your prediction for electronic trading in Asia for 2014?” – Hear from some
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of your industry peers. Page 34
Asia Equity Trading FY 2013 Recap. Our annual review of turnover, average trade sizes, spreads and market impact costs on Asia’s exchanges. Page 36
EQUITIES Japan’s alternative markets see hope in uptick reform – Revision of short-selling rules shows ongoing support for a fair market. Page 38
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Asia’s Fragmentation Footprint Q4 2013 – See the latest on alternative venue competition in Asia. Page 40
POST TRADE CITIC & CLSA: Milestone for the market and cornerstone for China – Post-merger plans are looking fruitful, writes Lynn Strongin Dodds. Page 44
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TECHNOLOGY BSE pushing technology arms race – Matching engine upgrade drives the arms race on the subcontinent. Page 46
BACK PAGE 48 Dates – Exchange holidays and important industry events. Directory – A listing of Asia’s electronic trading industry participants.
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IN THE ZONE
In the Zone... The last quarter of 2013 saw a flurry of activity as the industry pushed to complete projects by the end of the year. The most notable were in the OTC space with new clearing apparati, first trades and further regulations to support it. The listed derivatives spaces was busy too with new contracts, the LME and of course ICE’s purchase of SMX. There was news on the cash side as well but those details can be found In The Zone.
Australia ASX admitted Hyena Pty as an ASX 24 principal trading participant, and Goldman Sachs Australia as an ASX 24 trading participant and ASX Clear (Futures) participant. Meanwhile, Chi-X Australia, a wholly owned subsidiary of alternative trading venue operator Chi-X, entered its third year of operations on 1 November by reaching a firm-record weekly total market share of 18.39%, which was followed by a one-day record high market share of 24.67% on 4 November. In regulatory developments, market regulator ASIC’s new market integrity rule obligations relating to dark liquidity took effect on 10 November. The new regulations cover crossing system transparency, tick sizes, client opt outs, and suspicious activity. The regulator also implemented a new market surveillance system to conduct multimarket supervision across futures and equities in real time. ASIC fined ABN A$130,000 and UBS Securities A$50,000, the former for conduct which resulted in a market for a put option not being both fair and orderly, and the latter for contravening Market Integrity Rules.
China Moving to China, the Shanghai Futures Exchange and Singapore Exchange (SGX) signed a MoU on cooperation to develop the commodity derivatives markets in both countries. The two exchanges will jointly explore areas of cooperation including the development of derivatives for energy, metals, chemicals and commodity indexes. Meanwhile, on 21 October trading system supplier Fidessa announced that China Securities is using its Asian trading platform to trade Hong Kong equities and to access advanced trading tools to support algorithmic and basket trading. Also in the quarter, China Asset Management appointed Citi Hong Kong to provide global custody, trustee and fund administration services for its newly launched CES China A80 Index ETF.
Greg Medcraft New MIR obligations relating to dark liquidity took effect
trade by a client using LCH.Clearnet’s Interest Rate Swap clearing service, SwapClear. HKEx and SGX agreed 4 December to cooperate in several areas of common interest, including internationalization of the renminbi, by exploring joint product development. HSBC Securities made headlines in the quarter as it was fined HK$5 million by the SFC fines HSBC for providing inaccurate information in its ATS license application. On 11 October the SFC signed an MoU with the Financial Regulatory Commission of Mongolia establishing a framework for mutual assistance and the exchange of information between the two regulators.
India
Hong Kong Perhaps the biggest news to come out of Hong Kong in Q4 was HKEx’s rollout on 30 September of the first phase of its Orion Market Data Platform, which comprised the introduction of the new system in its securities market. On October 16, HKEx upgraded the trading and clearing systems for its derivatives market – HKATS (Hong Kong Futures Automatic Trading System) and DCASS (Derivatives Clearing and Settlement System) – to Genium INET, a new technology platform that provides better performance and supports the further development of the market. OTC Clearing Hong Kong, an HKEx subsidiary that was established to provide clearing services for OTC derivatives, announced that its soft launch of business was completed smoothly on 25 November. HKEx plans to introduce Mini Hang Seng Index and Mini H-shares Index futures to its After-Hours Futures Trading (AHFT) session starting on 6 January, 2014. The exchange also plans to add the block trading facility to AHFT on the same date, subject to approval. In early December, Standard Chartered announced that following the launch of its Standard Chartered Execution, Clearing, Liquidity and Portfolio Services (ECLiPSe), the bank had successfully cleared the first OTC
In early October, Deutsche Börse and BSE announced that the former will act as the exclusive licensor of the latter’s market data and information products to all international clients.
Richard Leung HKEx’s rolled out Orion Market Data Platform
Turning to India’s top commodity bourse, Multi Commodity Exchange of India Limited (MCX) and China’s Dalian Commodity Exchange signed a MoU to boost strategic co-operation. Staying with MCX, the Forward Markets Commission on 28 November approved the appointment of Satyananda Mishra as the exchange’s new board chairman.
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IN THE ZONE
will be expanded by linking fund processing platforms FundNet and Vestima and the two firms will cooperate to facilitate investments from international investors into Korean domiciled investment funds.
Malaysia
Michael Syn
Introduced three new Asian index contracts
ACE Derivatives and Commodity Exchange launched gold (1kg), silver (30kg), crude oil and copper futures contracts on 27 November.
Japan JPX announced on 9 October that combined year-to-date trading volume of derivatives products on Osaka Securities Exchange and Tokyo Stock Exchange had reached 300.6 million contracts, shooting way ahead of 2013’s volume of 234.3 million contracts. In other exchange news, from 1 November, Tokyo Stock Exchange started publishing the JPX JGB Futures Volatility Index, an index that shows the volatility of 10-year Japanese Government Bond Futures contracts. The Tokyo Commodity Exchange and Ginga Energy Japan announced in late November the establishment of the Japan OTC Exchange (JOE). The joint venture with Ginga, a Japanese subsidiary of Singapore-based energy broker Ginga Petroleum, will focus on OTC markets for petroleum and its products. The exchange is scheduled to go live by the end of March, 2014. Chi-X Global Holdings announced on 28 October that Rakuten Securities will become the first broker dealer in Japan to deploy Chi-X’s smart order routing technology.
Korea In October, Solace Systems, the provider of messaging middleware appliances, announced that Korea Exchange (KRX) had chosen its messaging appliances as the core data delivery infrastructure for the exchange’s new highspeed exchange platform, called EXTURE+. KRX’s next-generation trading system offers low latency trading across many asset classes, including equities, bonds, and derivatives, and is scheduled to go live in February, 2014. Meanwhile, in November, Korea Securities Depository and Clearstream reached an agreement on investment fund cooperation. Cross-border fund distribution support services
Securities Commission Malaysia, Bank Negara Malaysia and Perbadanan Insurans Deposit Malaysia issued a joint consultation paper 20 November on requirements for the reporting of trading activity in over-the-counter derivatives markets to a trade repository. A key element of the framework is mandatory reporting of OTC derivatives transactions by counterparties to an approved trade repository.
Singapore SGX launched several products in the quarter. November saw the introduction of three new Asian index contracts – SGX-PSE MSCI
Tal Cohen
Rakuten Securities first Japan broker to deploy Chi-Xís SOR tech
Philippines Index Futures, SGX MSCI Thailand Index Futures and SGX MSCI India Index Futures – and introduced Asian foreign exchange (FX) futures for deliverable and nondeliverable currencies. SGX is consulting the market on a new remote membership class, which would enable futures commission merchants registered with the US Commodity Futures Trading Commission (CFTC) to clear swaps for existing and new US customers through SGX’s derivatives clearing house, SGX Derivatives Clearing which was approved by US regulator the CFTC to clear OTC derivatives in December 2013. SGX Derivatives Clearing has proposed refinements to its Clearing Fund structure, and improvements in the auction process for managing a default of a member that clears over-the-counter financial derivatives. SGX has chosen London Stock Exchange Group’s MillenniumIT as the provider of a new posttrade system for the city-state’s securities market. SGX will work with MillenniumIT to enable the
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expansion of clearing, settlement and depository services into multi-currency, multi-asset solutions for SGX’s members. In non-SGX news, IntercontinentalExchange Group, a global network of exchanges and clearing houses, announced 19 November that it will acquire Singapore Mercantile Exchange (SMX) in an all-cash transaction. The acquisition includes the SMX Clearing Corporation, a wholly owned subsidiary of SMX and the clearing house for all SMX trades.
Taiwan On 1 July, Taiwan Stock Exchange (TWSE) announced the appointment of Michael Lin as president of the exchange. He succeeds Samuel Hsu. Lin joined TWSE as senior executive vice president in October 2006. Previous to this, he served as senior executive vice president of the Taiwan Depository & Clearing Corporation (TDCC). Before his tenure at TDCC, Lin held various management roles at the Fiscal Information Agency under the Ministry of Finance, as well as the Postal Savings Bureau, from 1990 to 2006. In other exchange news, TWSE and MIAX Options Exchange signed an MOU on 26 August to foster mutual cooperation and information exchange. The MIAX Options Exchange (MIAX) was approved by the US Securities and Exchange Commission (SEC) on 3 December, 2012, becoming the nation’s 11th options exchange. The signing of the MOU will enable US ETF issuers to launch options on MIAX that track ETFs linked to TWSE listed stocks. This could improve international links to the Taiwan capital market and encourage more investors to trade Taiwan securities. Meanwhile, the Financial Supervisory Commission (FSC) amended market rules to stimulate trading activity. Starting from 23 September, around 1,200 borrowed stocks currently eligible for margin trading will be exempt from the uptick rule and may be sold at a price lower than the closing price of the previous trading day. The uptick rule requires SBL short sales for borrowed shares to be entered at a price no lower than the previous day’s closing price. Currently 150 stocks are exempted from the uptick rule. The measure is expected to increase the ease of trading and expand hedging options available to investors. The FSC also plans to extend sameday trading to 200 large and mid-cap stocks from 6 January 2014.
Thailand In early October, the Thailand Futures Exchange announced it had partnered with Krung Thai Bank to offer a new service for US dollar futures holders, especially importers and exporters, and small- and medium-sized enterprises that enables them to exchange US dollars at KTB branches on the last trading day of the contract.
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COVER STORY
Asia’s Electronic Trading Industry 2013 Review
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n with a whimper and out with well not a bang exactly but certainly with cautious optimism that the worst is behind the industry. Both cash and futures volumes were up in aggregate in Asia, though not uniformly, helping the sell side recoup some of the costs of the regulatory burden they have been baring for so long. There is greater focus on clearing of OTC as the GFC hangover is finally filtering out of everyone’s system. Definite improvement in the equities market structure through regulatory moves and exchanges seeking to improve services. Thailand was a star this year, Singapore continues to carve out its place as a derivatives trading hub, China is trying to reform and Japan is leading APAC though derivatives trading doesn’t reflect that. All in all an exciting year indeed. We are pleased to bring you Asia’s electronic trading highlights for 2013.
n January Jan 10: Japan Exchange Group (JPX) and India’s National Stock Exchange (NSE) sign a letter of intent on preparing to launch S&P CNX Nifty Index futures on JPX’s Osaka Securities Exchange. Jan 16: The Australian Securities Exchange (ASX) joins four other international industry peers to create the Liquidity Alliance, a body aimed at creating an international approach to address the global collateral crunch brought about by regulatory changes to liquidity and collateral. Jan 23: The planned introduction of China-Hong Kong mutual recognition of funds represents a new frontier for the evolution of renminbi investment products and the development of asset management business, says Hong Kong Securities and Futures Commission’s (SFC) deputy chief executive officer, Mrs Alexa Lam.
n February Feb 5: Singapore Exchange (SGX) announces that its FTSE China A50 Index Futures achieved new records in January, with average
daily volume of 97,984 contracts and month-end open interest of 307,491 contracts, almost triple January 2012’s 108,112 contracts. Feb 6: Hong Kong Exchanges and Clearing (HKEx) launches its Mainland Market Data Hub Founding Members Programme. Feb 6: Taiwan Futures Exchange (TAIFEX) and Eurex announce that they have signed an agreement on a strategic alliance to cooperate in derivatives trading, with the former launching contracts based on the TAIEX, one of Asia’s most heavily traded indexes. Feb 10: Wayne Swan, former Australian deputy prime minister and treasurer, defers for two years the government’s decision on applications for licenses submitted by equity clearing houses, and requires ASX to develop a code of practice with its key stakeholders to ensure transparent and non-discriminatory access to ASX’s infrastructure. Feb 11: The equity and equity derivatives segment of India’s MCX Stock Exchange (MCX-SX) goes live. Feb 18: Eurex Exchange announces that it has received confirmation from the South Korean Financial Services Commission to offer its full suite of products in South Korea. Feb 19: ASX announces that it will expand its global network connectivity through the launch of ASX Net Global, a low-latency network for global customers to connect to the ASX, ASX 24 trading platforms and to the full range of services located in the ASX Australian Liquidity Centre. Feb 22: Tokyo Commodity Exchange (TOCOM) announces that monthly volume of customer trades originating overseas totalled 1,662,426 contracts in January, 2013, topping the all-time record set in August, 2011, of 1,592,485 contracts. Feb 25: SGX begins offering international customers the choice of clearing OTC transactions as swaps or futures contracts. Feb 26: Korea Exchange (KRX) and the Philippine Securities and Exchange Commission sign a contract to export KRX’s Market Surveillance System to the Philippine markets. Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
COVER STORY
n March March 1: Bursa Malaysia Securities issues revamped rules that are to take effect 2 May, 2013. The new regime includes liberalisations, and adopts a more principles-based approach to market regulation. March 3: Hong Kong’s SFC reprimands Manulife Asset Management and fines it HK$24 million for inadequate internal controls in relation to the distribution of the Manulife Global Fund from 2007 to 2012. March 4: The Osaka Securities Exchange (OSE) suffers a system failure, forcing the market to suspend trading for about four hours. March 4: Hong Kong’s SFC announces that it has banned Mr Du Jun, former managing director of Morgan Stanley Asia, from re-entering the industry for life after he was found guilty of insider dealing. March 6: SGX welcomes KGI Capital (Singapore) as a clearing and trading member of its derivatives market. March 7: Hong Kong’s SFC welcomes Renminbi Qualified Foreign Institutional Investors (RQFII) rule amendments that increase the types of qualified RQFII holders, as well as relax investment restrictions on RQFII funds. March 7: Japanese financial regulators say they plan to make permanent a ban on “naked” short selling that was implemented after the global financial crisis in 2008. March 12: SGX announces that it has signed a licensing agreement with global index provider MSCI for 14 new regional and country indices. March 12: Eurex Group and the Bombay Stock Exchange (BSE) announce that they have agreed to deepen their strategic partnership through a long-term technology alliance under which BSE will join the Eurex technology roadmap and deploy Deutsche Börse Group’s trading architecture in a first step. March 12: Trading volume of equity options at Tokyo Stock Exchange (TSE) reaches 74,573 contracts, the highest level since 13 January, 2011. March 12: SGX and KRX announce that they have signed an MoU to jointly explore collaboration in the development of OTC financial derivatives clearing capabilities, and SGX and the Philippine Stock Exchange (PSE) announce that they have signed an MoU to cooperate in the development of Philippines-linked derivatives products. March 14: KRX and Korea National Oil Corporation sign an MoU on mutual cooperation to promote KRX’s Electronic Petroleum Spot Market. March 14: Malaysia’s Securities Commission announces that the country’s capital market registered record performance in 2012, with its overall size reaching RM2.5 trillion, a 16.4% increase YoY. March 18: ASIC releases a report and consultation paper on dark liquidity and high-frequency trading (HFT). The paper says that although HFT does create ‘noise’ in the financial markets, some of the negative perceptions about HFT are unjustified, and found that order-to-trade ratios were not high, but had been moderate compared to overseas markets, and that they were not always driven by high-frequency traders. The report says that while the volume of dark trading remains at about 25-30%, the nature and use of such trading has changed, with less trading by fundamental investors on lit exchange markets, that growth in dark trading has led to a widening of bid-offer spreads in some securities, affecting price formation for these securities, and that dark venues such as crossing systems are growing in number and becoming increasingly multilateral and more market-like. March 18: KRX adds US treasury bills, notes, and bonds to its margin instruments in the derivatives market. March 18: The Thailand Futures Exchange (TFEX) increases its stock futures from 30 to 50. March 20: Chi-X announces that Phillip Capital Limited has been admitted as a trading participant. www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
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March 21: SGX and Philippine Dealing System Holdings sign an MoU to develop fixed income access between Singapore and the Philippines. March 22: Hong Kong’s SFC publishes its conclusions on proposals to enhance the regulatory framework for electronic trading. The changes are to take effect on 1 January 2014. March 22: Instinet names Shaun Bramham as its new regional head for Asia-Pacific. March 28: The Hong Kong Monetary Authority (HKMA) and SFC jointly announce their commitment to complying with the new international regulatory standards on financial market infrastructures (FMIs) that were issued jointly by the Committee on Payment and Settlement Systems (CPSS) of the Bank for International Settlements and the International Organization of Securities Commissions (IOSCO) in April, 2012. The report contains 24 principles for FMIs and five responsibilities of regulatory authorities to provide for the effective regulation, supervision and oversight of FMIs.
n April April 1: Japan’s Financial Services Agency releases revisions to its short-selling regulations and on measures to relax the restrictions on share buybacks, and extends existing temporary measures, including a ban on naked short selling, until 31 October 2013. April 2: Seven exchange CEOs announce at the 18th ASEAN Exchanges CEOs meeting the next phase of the rollout of Invest ASEAN 2013. April 3: Chi-X Australia announces the appointment of John Fildes as chief executive officer, effective 1 May, 2013. April 9: Opening of SGX derivatives market delayed as a system monitoring process did not function as expected. April 10: Chi-X announces that Canaccord Genuity (Australia) has been admitted as a trading participant. April 12: OSE announces that it will increase the contract months for futures and options, and strike prices for options, on the Nikkei 225. April 18: SGX announces that it has appointed Jenny Chiam as senior vice president, head of securities. April 19: Chi-X announces changes to NBBOX validation and hidden orders that are required to address amendments to ASIC’s Market Integrity Rules (MIRs) and will take effect 27 May, 2013. The new rules require Chi-X’s hidden orders to provide meaningful price improvement and for the validation of NBBOX trade reports to be changed. April 24: SGX clears its first AsiaClear Iron Ore Futures trades. April 26: SGX welcomes Malayan Banking (Maybank) to AsiaClear as a bank clearing member for OTC financial derivatives. April 29: Australia announces that new Market Integrity Rules for the Asia Pacific Stock Exchange have been approved. April 29: SGX welcomes DMG & Partners Securities as a clearing member of its derivatives market. April 30: ASX announces that it plans to extend its new OTC Derivatives Clearing Service to deliver a client clearing solution by end-2013.
n May May 2: NYSE Liffe announces that it has doubled its Asian membership within the previous six months and welcomes Taiwan brokerage KGI Futures as a member of the exchange’s London and Paris markets. May 3: Jupiter Asset Management announces that is has appointed Peter Swarbreck as head of its Asia Pacific business. May 5: Global brokerage BGC Partners announces that it has been granted a license by the South Korea’s Financial Services Commission to offer principal bond trading to financial institutions in South Korea.
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COVER STORY
May 7: Japan’s JNX Cross service, a platform for participants to cross their orders prior to primary exchange market open and execute at the VWAP price after market close, goes live. May 8: ASX announces that exchange-traded Australian Government Bonds will be available for trading on the exchange from 21 May, 2013. May 14: Multi Commodity Exchange (MCX) of India commences futures trading in guar seed and guar gum contracts. May 15: The Nasdaq OMX Group announces that China’s first crossborder exchange-traded fund, the Guotai Nasdaq-100 ExchangeTraded Fund, which is based on the Nasdaq-100 Index, has begun trading on the Shanghai Stock Exchange (SSE). May 15: MCX-SX starts trading futures and options based on its flagship SX40 index, a free float-based index of 40 large cap and liquid stocks. May 18: The Hong Kong Mercantile Exchange (HKMEx) announces that it has decided to voluntarily surrender its authorisation to provide automated trading services granted by the SFC. Effective immediately, no new orders may be placed and all open positions will be financially settled at the settlement price determined by HKMEx and its designated clearinghouse. May 21: Hong Kong’s SFC announces that is has reprimanded and fined UBS Securities Hong Kong HK$1.6 million for regulatory breaches and internal control failings. May 26: New ASIC market integrity rules relating to pre-trade transparency exceptions come into effect. The new regime introduces tiered thresholds for block trading, while the meaningful price improvement exception to pre-trade transparency does away with the ‘at or within the spread’ exception. May 27: IMC Pacific becomes an ASX 24 Principal Trading Participant. May 28: Messaging provider SWIFT announces that CLSA has become the first Asian broker to go live on the former’s Global Electronic Trade Confirmation solution for the automation of allocation and confirmation processes.
n June June 6: HKEx and The London Metal Exchange (LME) announce that Martin Abbott, HKEx’s co-head of global markets and LME’s Chief Executive, has resigned. June 7: MCX-SX launches a dedicated debt market segment. June 11: Hong Kong’s SFC announces that it has reprimanded and fined Credit Suisse Securities HK$1.6 million for regulatory breaches and internal control failings. June 13: SGX proposes circuit breakers for the securities market. June 14: The Monetary Authority of Singapore (MAS) releases a proposed regulatory framework for financial benchmarks. The new framework is intended to enhance the integrity of the processes for setting the financial benchmarks.
n July July 1: Modelled on London’s Alternative Investment Market, the Korea New Exchange (KONEX) market launches. The market is intended to provide young venture firms with growth opportunities and lend support to the government’s “creative economy” vision. The criteria for listing are fewer than for listing on KRX’s KOSDAQ market. July 2: Taiwan Stock Exchange (TWSE) announces the appointment of Michael Lin as its new president. He succeeds Samuel Hsu. July 7: Australia’s ASIC releases new rules for OTC derivatives trade reporting obligations of financial institutions and regulations for derivative trade repositories.
July 15: TFEX adds 10 new stock futures and the combination series of SET50 Index Futures and Gold Futures to its line-up. July 16: OSE and TSE integrate their equity markets. July 18: Bursa Malaysia announces its best quarterly and first-half financial results since the 2007 rally. July 19: SGX issues proposals to publish closing prices for ETFs and put in place a methodology to determine closing prices for ETFs that will reflect more closely prevailing market conditions. July 25: Hong Kong’s SFC announces survey results that indicate that the Special Administrative Region continued to serve as an investment platform for attracting capital from non-Hong Kong investors in 2012, with overseas investors contributing HK$8,018 billion, or 64.6%, of the total fund management business, excluding real estate investment trusts (REITs).
n August Aug 1: Deutsche Börse announces that it has connected the first participant from Hong Kong, Celestial Securities, to its Xetra trading system, which connects more than 240 trading participants in 18 countries. Aug 5: SGX starts trading shares of Yangzijiang Shipbuilding, the first company to have trading of its shares in renminbi on the exchange’s dual-currency trading platform. Aug 9: Chi-X announces that it will make a number of changes to its trading system in September and October, 2013, to comply with ASIC’s Market Integrity Rules, including the introduction of regulatory data requirements. Aug 14: India’s ACE Derivatives and Commodity Exchange announces the launch of new season crude palm oil contracts and changes to the contract specification of its soymeal contracts. Aug 19: SGX proposes to reduce the standard board lot size of securities listed on the exchange from 1,000 to 100 units, with a view to reducing it to 1 unit in the longer term. The move is intended to benefit investors as they would find it easier to invest in higher priced shares. Aug 27: HKEx and LME announce the appointment of Garry Jones as the chief executive of the LME to succeed Martin Abbott, who resigned in June. Aug 27: Bursa Malaysia records a daily derivatives trading historical all-time high of 91,449 contracts.
n September Sep 2: TFEX decreases the minimum size required for block trade transactions of high notional-valued contracts. Sep 3: Citi announces that it has been appointed by Whiz Partners to support fund administration and transfer agency services for the latter’s newly launched Whiz Rock Global Macro Investment Fund (Global Macro Investment Fund) in Asia. Sep 5: Hong Kong’s SFC announces it has reprimanded Sun On Tat Securities Company Limited and fined it HK$1.6mn for internal control failings. Sep 6: Premium Stars Investments is convicted by a Hong Kong court and fined after pleading to one count of illegal short selling. Sep 11: Commonwealth Bank of Australia becomes an ASX Clear OTC clearing participant, and Deutsche Bank AG becomes an OTC clearing participant of ASX Clear (Futures). Sep 11: SGX and Clearstream announce that they have signed a letter of intent on the launch of a collateral management service to enable customers to more easily and efficiently use assets held at SGX’s securities depository for their collateral needs. Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
COVER STORY
Sep 12: ASX’s OTC Derivatives Clearing Service clears its first Australian dollar interest rate swap trade. Sep 18: TWSE welcomes recently announced measures by the Financial Supervisory Commission to stimulate trading activity. Starting 23 September, around 1,200 borrowed stocks currently eligible for margin trading will be exempted from the uptick rule and may be sold at a price lower than the closing price of the previous trading day. Sep 30: HKEx announces that it has rolled out the first phase of its Orion Market Data Platform (OMD), one of the exchange’s HKEx Orion technology initiatives, with the introduction of a new system in its securities market. OMD is powered by NYSE Technologies’ Exchange Data Publisher.
n October Oct 2: Deutsche Börse Market Data + Services and BSE sign a partnership deal under which for the former will act as the exclusive licensor of BSE market data and information products to all international clients. Oct 4: Goldman Sachs Australia is admitted as an ASX 24 trading participant and ASX Clear (Futures) participant. Oct 8: Messaging appliance provider Solace Systems announces that KRX has selected its appliances as the core data delivery infrastructure for the exchange’s new high-speed exchange platform. The new system, called EXTURE+, is the KRX’s next-generation trading system and offers low latency trading across asset classes. Oct 14: ASX launches futures contracts based on the S&P/ASX 200 Resources Index and the S&P/ASX 200 Financials-x-A-REIT Index. Oct 15: Hyena is admitted as an ASX 24 principal trading participant. Oct 16: HKEx announces that it has upgraded the trading and clearing systems for its derivatives market – HKATS (Hong Kong Futures Automatic Trading System) and DCASS (Derivatives Clearing and Settlement System) – to Genium INET. Oct 18: TFEX announces that is partnering with Krung Thai Bank (KTB) to offer a new service for US dollar futures holders that enables the holders to exchange US dollars at KTB branches on the last trading day of the contract. Oct 19: SGX and the Shanghai Futures Exchange sign an MoU on cooperating to develop the commodity derivatives markets in both China and Singapore. Oct 21: ASX commences trading of S&P/ASX 200 VIX futures. Oct 21: SGX launches two thermal coal futures contracts – SGX API 8 CFR China Coal Index Futures and SGX IHS McCloskey Indonesian Sub-bit FOB Index Futures Contracts. Oct 23: Citi Hong Kong announces that is has been appointed by China Asset Management to provide global custody, trustee and fund administration services for the latter’s newly-launched CES China A80 Index ETF. Oct 25: SGX consults the market on a new remote membership class, which would enable futures commission merchants registered with the US Commodity Futures Trading Commission to clear swaps for existing and new US customers through SGX’s derivatives clearing house. Oct 28: Chi-X Global announces that Rakuten Securities will become the first broker dealer in Japan to deploy the former’s smart order routing technology.
n November Nov 1: Chi-X Australia enters its third year of operations by reaching a firm-record weekly total market share of 18.39%. Nov 1: TSE starts calculating and publishing the JPX JGB Futures www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
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Volatility Index, an index that shows the volatility of 10-year Japanese Government Bond Futures contracts. Nov 7: SGX announces that it has chosen London Stock Exchange Group’s MillenniumIT as the provider of a new post-trade system for the city-state’s securities market. Nov 10: ASIC’s new market integrity rule obligations relating to dark liquidity come into effect. Nov 11: SGX launches six Asian foreign exchange (FX) futures for deliverable and non-deliverable Asian currencies pairs comprising AUD/USD, AUD/JPY, USD/SGD, INR/USD, KRW/USD and KRW/JPY. Nov 18: HKEx announces that it plans to introduce Mini Hang Seng Index (Mini HSI) and Mini H-shares Index (Mini HHI) Futures to its AfterHours Futures Trading (AHFT) session starting 6 January, 2014. Nov 19: IntercontinentalExchange (ICE) Group announces it has reached an agreement to acquire Singapore Mercantile Exchange (SMX) in an all-cash transaction. Nov 20: MCX and China’s Dalian Commodity Exchange announce that they have signed an MoU to boost strategic co-operation. Nov 20: Securities Commission Malaysia, Bank Negara Malaysia and Perbadanan Insurans Deposit Malaysia issue a joint consultation paper on requirements for the reporting of trading activity in derivatives markets to a trade repository. Nov 24: First Derivatives, a provider of software and consulting services, announces the successful implementation of its market surveillance system at ASIC. Nov 25: OTC Clearing Hong Kong (OTC Clear), an HKEx subsidiary, rolls out clearing services for OTC derivatives and clears its first OTC derivatives transaction. Nov 25: SGX launches three Asian Index Futures – SGX-PSE MSCI Philippines Index Futures, SGX MSCI Thailand Index Futures and SGX MSCI India Index Futures. Nov 27: ACE Derivatives and Commodity Exchange launched gold 1 kg, silver 30 kg, crude oil and copper futures contracts. Nov 28: MCX receives approval from India’s Forward Markets Commission for the appointment of Mr. Satyananda Mishra as the chairman of the exchange’s board.
n December Dec 4: HKEx and SGX agree to cooperate on promoting internationalization of the renminbi by exploring joint product development, and enhancing connectivity through points of presence in each other’s data centers. Dec 4: TAIFEX and Eurex Exchange announce that they plan to launch TAIEX futures and options as daily expiring futures on Eurex Exchange. Dec 11: Standard Chartered announces that following the launch of its Standard Chartered Execution, Clearing, Liquidity and Portfolio Services (ECLiPSe), the bank has cleared the first client OTC trade using LCH.Clearnet’s Interest Rate Swap clearing service, SwapClear. Dec 16: HKEx and LME announce the board of LME Clear scheduled for launch 22, September 2014. Dec 27: China Securities Depository and Clearing Corporation becomes CCASS clearing agency participant . Well there you have it. Asia’s electronic trading industry in a nutshell for 2013. Its hard to argue that Asia is not the place to be with so much going on across many different asset classes, investor types and market structures. Investment from Dubai to Tokyo, Sydney to Mumbai throughout the industry continues to unfold. Is Asia going to become the centre of global capital markets and electronic trading? We shall be watching.
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COVER STORY 2
ASEAN: Thailand takes ASEAN trading mantle While value traded has increased across the ASEAN five markets, the significant reforms of the Thai exchange are surpassing growth elsewhere. By Dan Barnes
I
n 2013, Stock Exchange of Thailand (SET) saw the value traded on its market surpass that of Singapore Exchange (SGX), traditionally the largest of the ASEAN five. From January to November 2013, SET saw 68% growth year-on-year over the same period in 2012, according to data from industry body, the World Federation of Exchanges. The volume was not reflective of economic growth; by most measures Thailand has seen its gross domestic product growth predictions lowered to around 3% by the end of the year, from around 5% at the start. The other ASEAN markets have also seen a drop off in relative performance. “This year the ASEAN markets haven’t done very much at all in performance terms,” says Lee Porter, CEO of buy-side block trading venue Liquidnet Asia. “However if you look back over the previous two years they have been the outperformers which has attracted a huge amount of assets and peoples’ exposure to these markets has increased fairly gradually. The challenge that the big institutional firms have is that the returns might look great, the available liquidity to exit that position and get exposure to those markets is more difficult.” Concerns about the potential impact from a withdrawal of quantitative easing in the US and Europe are being priced into the market, however the recent interest has spurred on the development of increased access to the ASEAN countries as result. “We can get access more easily than people think in South East Asia,” Josephine Kim, head of Electronic Trading Sales, Asia Pacific Equities at Bank of America Merrill Lynch. “A lot more buy-side firms are launching emerging market funds which is adding impetus.”
Market reform The region’s exchanges have been alive to this interest. Thailand has been actively reforming its trade processing to facilitate access to Thai stocks. In 2012 it changed its post-trade regulation to enable the outsourcing of clearing to third parties and the use of global custodians for dual-listed stocks. Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
COVER STORY 2
Charamporn Jotikasthira, president of SET says that the exchange has boosted its volume in part by developing attractive products. Overseas investors have increased their trading volume by 50% over the last year, with some key initiatives designed to attract foreign institutions. “We have tried to increase the number of listed firms in the MSCI index”, he says. “This year we added five companies without anyone dropping off. Since three years ago when I joined, I learned from major fund managers that there are certain limits to size and liquidity that the major fund managers can buy, such as market cap should be more than a billion and trading volumes should be over US$10 million.” In 2008, SET only had eight companies in that category, by the end of 2013 there were just over 30 companies with over a billion in market capitalisation, however with a turnover slightly smaller than the US$10 million target. “That helps a lot, as these companies are now on the in radar of major fund managers,” says Jotikasthira. Domestic institutions have also increased trading volume by over 50% while the past two years have seen retail trading expanded through teaching financial literacy. “This year alone we have opened more than 120,000 new accounts, through internet trading alone,” he says. “We were targeting 90,000 people this year, but reached 96,000. On the supply side SET has reached a record number of IPOs with an expectation of 40 by year end. The original target was to raise 120 billion baht, but we have reached over 300 billion baht. That is a record.” Nevertheless such expansion in the primary market does not serve to fully explain the success of its secondary market. Market capitalisation, averaging US$4.17 billion a month to November 2013, is roughly half that of Singapore (US$7.75 billion), and lower than that of Indonesia (US$4.39 billion) and Malaysia (US$4.79 billion). At the same time its average monthly value traded January to November in 2013 was US$32 billion, around three times that of Indonesia (US$10 billion) or Malaysia (US$12 billion) and 33% more than Singapore (US$24 billion) which in 2012 had been averaging US$2 billion more as a monthly average. The exchange has also revamped its trading engines, going live in September 2012 with a new platform built by trading software vendor Cinnober, to offer more efficient trading. “Our roundtrip latency is 150 microseconds, so we are fast, and our capacity can grow ten times what we have today,” says Jotikasthira. “The next step, is that we start to assist even further those foreign institutions investing using
Josephine Kim Head of Electronic Trading Sales Asia Pacific Equities
Bank of America Merrill Lynch
“In the case of Thailand we went live with DMA algos in December 2012, it was one of the few markets where clients were pushing us to get DMA access”
high tech systems, algorithms and HFT with DMA. Combined that is about 10% of volume at present. In the future we will allow colocation and we expect volumes to grow.” This modernisation clearly correlates with the trading boost – as of September 2012 SET has continuously surpassed SGX in terms of value traded. There was a latent desire amongst investors to move into Thailand says Kim. “In the case of Thailand we went live with DMA algos in December 2012, it was one of the few markets where clients were pushing us to get DMA access,” she says. “They were just waiting for the day they could go live and from day one they were trading because it is so much easier.”
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Walking the fine line between supporting overseas investors and local investors makes Jotikasthira cautious. The exchange does not want to increase the volume of high-frequency trading (HFT) too much, given the potential effects that a few short-term, high-volume players can have if they suddenly exit a market, or disrupt confidence. “We are concerned about a mini crash or a flash crash and so we are putting controls in place, for example price band-based circuit breakers similar to those on the Tokyo Stock Exchange or SGX,” he says. “We should have that in place soon and then you will see a lot more colocation with us and a higher percentage of HFT. We want to go one step because our market is 55% retail volume. That is our bread and butter – so we don’t want to impact that flow.”
The bigger picture The wider ASEAN market has also seen trading volumes rise, although to a lesser extent. All of the ASEAN five markets are difficult to trade, with thin liquidity profiles and potentially very wide spreads. As a consequence market impact from trading large size can be enormous. Buy-side block-trading venue Liquidnet provides access to Singapore, Thailand, Indonesia, Philippines, and Malaysia. Where a year ago they comprised around 12% of overall volume on Liquidnet, they now make up around 16%. While in absolute terms that is still relatively small, proportionally it is approximately 30% growth year-on-year. In the derivatives market, SGX has outstripped its peers, with its trading for listed contracts making up 89% of ASEAN volume, and having grown to 7.8 million contracts traded in November 2013 up from 6.5 million contracts in November 2012. Since January 2012 ASEAN listed contracts volume has increased 71% to November 2013. Porter believes that activity continues to grow in the equities markets because falling performance for one investor indicates a better price at which to buy a security for another. “What we saw this year, particularly when there was run on Indonesia, is that these events create opportunities; what is a strong sell signal for one person is a strong buy opportunity for another,” he says. “We saw volume pick up significantly through that period, it was a highly volatile market. If you have a strong motive to buy or to sell, one way or the other, when you do get an outside liquidity opportunity you will take advantage of it more often than not, because those opportunities can be quite fleeting.” SET’s performance may also be based on its exposure to other countries; it has been developing some fairly innovative products, including the offering of shares in holding companies that funds operations in high growth
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COVER STORY 2
“Overseas investors have increased their trading volume by 50% over the last year, with some key initiatives designed to attract foreign institutions.” - Charamporn Jotikasthira, President of SET
developing and frontier markets such as Laos, Cambodia and Vietnam. The ASEAN markets have only recently been opened up by brokers and while the Philippines has also seen significant growth albeit from a smaller base (see page 26 for interview with CEO, Hans Sicat), Indonesia, Malaysia and Singapore have all had less success. Partly this demand has relied upon the development delivered by big brokers, who are able to invest resources into technology that will facilitate trading at higher volumes. “A lot of the local brokers don’t develop their own [platforms],” says Daniel Lee, director of Electronic Trading at broker DBS Vickers. “Brokers often work with foreign partners to develop algos or alternatively they buy them off-the-shelf. Even if you are a big local broker, you aren’t going to invest billions developing a group of algos; that is only cost-effective if you are multi-national, so you can then re-use them on a global, regional or single market basis.” This does not necessarily impede the local firms who typically enter white label relationships with those sell-side firms that have developed trading platforms. There are still considerable amounts of customisation that need to be applied to the algos at present to fit the market microstructure. “You have to switch between the local and foreign board,” Kim notes. “When you can do that electronically it is attractive enough for the clients so we have seen a lot of momentum there.”
As volumes grow, standardised trading systems will become more viable and margins for electronic trading will be driven down. Most of the markets are pushing for increased primary market activity with a controlled growth of the secondary market. Although HFT firms are a source of liquidity market heads typically share the same concerns about market orderliness that Jotikasthira expresses. Lee says that HFT trading seen in the markets at present are not exactly the same as in developed market. “Often they will use index arbitrage or event arbitrage strategies but the speed may not be the same as you see in very developed markets.”
With the continuing development of technology, he says he is still bullish about the ASEAN markets looking ahead. “It would be interesting to see what might happen should there be a harmonisation of market practices,” he says. “When each market has different tim ings and different processes then traders don’t have any overriding framework to operate in. If we were to have a framework like that, similar to what we see in Europe, investors may begin to see ASEAN as a unit, as an asset class in itself. Such a structure allows regions like Europe to be seen in this way, and each exchange is still able to operate separately. It would make things easier from a regional trading perspective.”
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
BOCA 2014 39th annual international futures industry conference march 11-14, 2014
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Where the Listed Derivatives World Meets The FIA International Futures Industry Conference enjoyed record attendance in 2013. More than 1,000 delegates attended sessions and social events, visited with exhibitors, held meetings and made announcements. And these aren’t just any delegates--Boca gives you access to chief executives, presidents, chairmen, and global heads of listed derivatives and OTC clearing. An impressive list of speakers addressed the challenges of regulatory reform and made predictions about the future of markets. More than 40 trading venues from Chicago to Shanghai are represented at the conference. More than 30 brokerage firms and an increasing number of representatives from the buy-side attend. In addition, 58 regulators and 60 journalists and research analysts participated in the 2013 conference.
Registration is now open! Register today at www.futuresindustry.org/boca-registration and mark your calendar to attend Boca 2014.
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DERIVATIVES
The battle to be commodity king of Asia Dominance in the Asian commodities market is far from clear; exchanges consolidate like generals mustering troops By Dan Barnes
W
hen Hong Kong Exchange and Clearing Corporation (HKEx) bought the London Metal Exchange (LME) in 2012, it appeared to have stolen a march on the fledgling competition, rivals Hong Kong Mercantile Exchange (HKMex) and Singapore Mercantile Exchange (SMX). Its ability to support mainland metals trading gave it the biggest prize in the region. This seemed all but assured when HKMex collapsed in May 2013 with the arrest of several staff. Meanwhile SMX saw trading volumes spiral downwards, under the shadow of regulators investigating parent company, FTIL. Now HKEx’s dominance is in doubt. Reports have surfaced that question its ability to provide efficient supply to and from mainland China, by casting doubt on the ability of the LME to base warehouses in the Shanghai free trade zone (SFTZ). At the same time the Shanghai Futures Exchange (SHFE) has signed a memorandum of understanding (MoU) with Singapore Exchange (SGX) and the SMX has been acquired by the giant exchange and infrastructure operator
Intercontinental Exchange (ICE) for US$150 million. These two deals create credible competition for HKEx/LME. “The primary motivation behind these deals lies in capturing Asian economies growth trajectory,” says Sebastian Pang, head of Energy Asia ex Japan, at futures broker Newedge, a direct Clearing member on the SGX, ICE, LME and HKEx. “Aside from that, clients often cite rapid regulatory reforms as their key concern. In turn, this is leading to greater need to consolidate and have economies of scale especially in areas such as back-office processing, compliance and margin monies optimisation.” The need to post margin with a clearing house to cover changes in the value of derivatives contracts can leave traders with a need for large amounts of collateral that the clearer can hold as security. If a single clearing house is used to clear trades, the margin required for long and short contracts can be netted off, limiting the gross amount of collateral that must be supplied. It is therefore less costly to run business through a single, large venue and its incumbent clearinghouse which makes consolidation attractive to traders.
“Clients are sanguine that clearing is only going to be more important, and optimisation of margin monies balance is certainly one key aspect,” says Pang. “If a particular exchange has cross-border presence, with wide product offering and clear exchange guidelines, it will certainly make it more attractive for clients to trade on it.”
First blood The HKEx / LME deal was the first cross-border acquisition involving an Asian exchange; that the target was in Europe made it more interesting, although perhaps not surprising given Europe’s history of openness to extraregional M&A. “In my opinion HKEx bought LME to give it influence on price discovery for negotiations in metals,” says Diego Perfumo, exchange analyst at research firm Equity Research Desk. “If you also control the warehouses and points of delivery, you have strong bargaining power with the Australian and Brazilian mining companies. Asia has become probably the largest consumer of commodities and typically one sees price discovery ending up where
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
DERIVATIVES
the demand for supply is. As the demand shifts from the west to the east you also see that these price discovery mechanisms follow the demand.” However if the LME would not be allowed to establish warehouses on mainland China in the SFTZ, that could be a problem. A recent report by Reuters said that a move to allow the LME access had been held up by the securities regulator the China Securities Regulatory Commission (CSRC), however the HKEx says that is has not been made aware of this. “As the market is widely aware, Mainland regulations currently do not allow for overseas exchanges to licence commodities warehouses on the Mainland; we are not aware of any new developments specifically relating to setting up warehouses in the Mainland/Shanghai FTZ,” a spokesman for HKEx said. “Mainland warehouses are one of a number of measures that the LME is seeking, in order to improve the efficiency with which Mainland investors can access the LME to manage their commodities price risk.”
First blood (part II) The ICE / SMX deal is the second cross-border acquisition in Asia, but the first with an Asian target and an extra-regional acquirer, which again adds an interesting element; ICE is the first truly global exchange operator. “ICE is looking at the long term,” says Thair Hussein, head of global sales at broker Philip Futures. “It wants to extend into Asia, especially China and of course India, SMX allows it to advance its groundwork into these territories. In the long run it is a good step, paying a premium to get a licence and operations established in Singapore.” Perfumo says “The ICE move is a beachhead to see how it can build a marketplace while there is huge demand moving toward east and the exchange is trying to capture that demand.” The MoU between SGX and SHFE signed on 19 October will allow them to explore areas of cooperation including the development of derivatives for energy, metals, chemicals and commodity indexes. The MOU also covers exchange of ideas and information sharing. Hussein says that there may be some time before this delivers market level change. “I would leave the SGX Shanghai agreement to one side for the moment, I think it is just sharing of ideas and sharing input on how to bring the customers from China to Singapore and vice versa,” he says. What will be crucial in both deals is the ability to develop products that will attract liquidity and will be hard to replicate.
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established iron ore contract, whilst ICE has market leading contracts such as Brent and Gasoil. The expansion of product offerings are likely to provide clients with better access and greater choice in hedging. He says, “We believe this [MoU] will lead to further areas of co-operation between the two exchanges, especially when exchanges in the region want to align themselves with the rapid growth in China and pan-Asia markets.”
New blood
Thair Hussein Head of Global Sales
Broker Philip Futures
“I would leave the SGX Shanghai agreement to one side for the moment, I think it is just sharing of ideas...”
Claire Miller, spokeswoman at ICE, says, “While we have not yet taken a decision on new products, we intend to look at opportunities for new financial and commodity derivatives contracts. Following the NYSE Euronext acquisition, ICE now has a global network of 16 exchanges and five clearing houses, operating across all asset classes. ICE and Liffe have market participants in Asia and have seen increased business originating from the region in recent years, for example in our Asia energy derivatives such as Singapore fuel oil.” Pang notes that SHFE has shown product innovation and believes the MoU with SGX could prove fruitful, however he expects there will be complementary product offerings, rather than competing. He notes that SGX has an
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
HKEx’s commodities strategy is to build on the deep liquid markets of the LME and expand the existing business by lowering barriers for Asian particularly mainland investors to access the LME market, according to its spokesman. The degree to which SHFE might seek to compete with it is uncertain, asserts Perfumo. “Every time the Brazilian economy does well it sees an inflow of capital, which poses a problem for its exchange rate,” he says. “China has to exert more control and Hong Kong is a fantastic way to do that. Without the yuan being fully convertible, Hong Kong and Shanghai today do not compete at all. Each has its own role.” In its three-year strategic plan, HKEx says that it views commodities as the asset class most likely to see a breakthrough based on Mainland demand, deepening its relationships with the mainland exchanges and clearing houses, moving towards partnership and eventually mutual market access. Perfumo suggests that when the currency becomes fully convertible the exchanges could either merge and become a national champion exchange or as an alternative, have exchanges focussed on different product segments. “Shanghai might focus on industrials/ commodities while HK focuses on financials, similar to Nasdaq and NYSE in the US,” he says. ICE may well be able to use its established market share in the west to draw traders into Asia while SGX has a track record of appealing to firms that seek access into markets that are proving difficult to enter, which has helped it to drive up liquidity. “It is very likely that there will be higher cross border flows, especially originating from Europe and US,” says Pang. “Overseas investors have always expressed interest to participate in Asian markets. However, lack of familiarity on regulations and on-shore expertise, are often cited as barriers. With the former cross-border acquisitions, European and US investors can derive greater comfort in that exchange rules are likely to be applied consistently for the Asian Exchange trades.”
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VOLATILITY
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
VOLATILITY
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
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18
DERIVATIVES
TOP 50 Futures Contracts by Volume in Asia for 2013 2013
2012
Product
Vol
Vol
Shanghai Futures Exchange
Steel Rebar
587,457,858
361,124,960
226,332,898 Metal
National Stock Exchange of India
US Dollar/Indian Rupee
566,399,936
620,215,043
-53,815,107 Currency
Dalian Commodity Exchange
Soy Meal
530,715,184
651,753,306
-121,038,122 Agriculture
Zhengzhou Commodity Exchange
Flat Glass
471,733,517
32,273,840
439,459,677 Commodity
MCX-SX
US Dollar/ Indian Rupee
423,589,258
551,326,121
-127,736,863 Currency
Shanghai Futures Exchange
Silver
346,445,222
42,529,908
303,915,314 Metal
Zhengzhou Commodity Exchange
Rapeseed Meal
332,252,395
842,414
331,409,981 Commodity
Dalian Commodity Exchange
Coke
230,613,274
65,831,770
164,781,504 Commodity
Zhengzhou Commodity Exchange
Pure Terephthalic Acid (PTA)
215,785,470
242,527,826
-26,742,356 Commodity
Zhengzhou Commodity Exchange
White Sugar
204,398,722
296,580,380
-92,181,658 Commodity
Dalian Commodity Exchange
Soy Oil
192,669,346
137,717,108
54,952,238 Agriculture
Dalian Commodity Exchange
Palm Oil
164,990,460
86,620,026
78,370,434 Agriculture
Shanghai Futures Exchange
Rubber
144,876,116
150,352,532
-5,476,416 Commodity
Dalian Commodity Exchange
Linear Low Density Polyethylene (LLDPE) 144,284,168
143,743,074
541,094 Commodity
Shanghai Futures Exchange
Copper
128,591,712
114,569,670
14,022,042 Metal
Dalian Commodity Exchange
Hard Coking Coal
68,519,100
-
68,519,100 Commodity
Korea Exchange
US Dollar
51,814,466
45,853,040
5,961,426 Currency
Australian Securities Exchange
3 Year Treasury Bond
49,037,738
44,003,411
5,034,327
Shanghai Futures Exchange
Gold
40,175,648
11,833,490
28,342,158 Metal
Multi Commodity Exchange
Crude Oil
39,558,169
57,790,229
-18,232,060 Energy
Multi Commodity Exchange
Silver Micro
33,611,357
51,441,996
-17,830,639 Metal
Australian Securities Exchange
90 Day Bank Bills
29,020,415
21,382,203
7,638,212
Dalian Commodity Exchange
Corn
26,627,266
75,648,712
-49,021,446 Agriculture
Zhengzhou Commodity Exchange
Rapeseed Oil
26,576,655
674
26,575,981 Agriculture
Shanghai Futures Exchange
Zinc Futures
24,166,332
42,201,848
-18,035,516 Metal
Australian Securities Exchange
10 Year Bond
23,929,177
18,469,473
5,459,704
Multi Commodity Exchange
Natural Gas
23,828,800
27,886,670
-4,057,870 Energy
Zhengzhou Commodity Exchange
Cotton No. 1
22,295,053
42,067,292
-19,772,239 Commodity
Dalian Commodity Exchange
No. 1 Soybeans
21,987,000
90,950,850
-68,963,850 Agriculture
Multi Commodity Exchange
Silver Mini
20,267,222
36,266,593
-15,999,371 Metal
Tokyo Financial Exchange
US Dollar/ Japanese Yen
20,120,943
9,212,876
10,908,067 Currency
Multi Commodity Exchange
Copper
19,758,713
32,520,309
-12,761,596 Metal
Multi Commodity Exchange
Gold Petal
19,021,199
36,004,247
-16,983,048 Metal
Multi Commodity Exchange
Gold Mini
15,860,098
22,213,409
-6,353,311 Metal
United Stock Exchange
US Dollar/ Indian Rupee
14,530,838
7,096,522
7,434,316 Currency
Tokyo Commodity Exchange
Gold
12,623,185
11,895,357
727,828 Metal
Multi Commodity Exchange
Copper Mini
12,260,544
18,214,742
-5,954,198 Metal
Dubai Gold Commodity Exchange
US Dollar/ Indian Rupee
11,783,685
8,638,993
3,144,692 Currency
Multi Commodity Exchange
Silver
11,754,822
17,284,529
-5,529,707 Metal
Tokyo Financial Exchange
Euro/ Japanese Yen
11,291,735
16,927,476
-5,635,741 Currency
Tokyo Financial Exchange
Australian Dollar/ Japanese Yen
10,256,158
16,500,368
-6,244,210 Currency
Multi Commodity Exchange
Lead Mini
10,039,855
10,396,675
-356,820 Metal
Tokyo Stock Exchange
10 Year JGB
9,132,122
8,865,284
266,838
Multi Commodity Exchange
Gold
8,944,603
10,287,609
-1,343,006 Metal
Multi Commodity Exchange
Nickel
8,745,308
15,414,792
-6,669,484 Metal
Zhengzhou Commodity Exchange
Thermal Coal
8,714,768
-
8,714,768 Commodity
Zhengzhou Commodity Exchange
Methanol
8,057,465
7,594,824
462,641 Commodity
Bursa Malaysia
Crude Plam Oil
8,014,914
7,460,107
554,807 Agriculture
Multi Commodity Exchange
Zinc Mini
7,120,193
8,896,512
-1,776,319 Metal
Total
5,414,248,184 4,329,229,090
Difference Type
United Stock Exchange data NA. Source: Exchange Websites
Exchange
Interest Rate
Interest Rate
Interest Rate
Interest Rate
1,085,019,094
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
DERIVATIVES
Stock Index Futures Index
Osaka Securities Exchange Nikkei 225 mini China Financial Futures Exchange CSI300 National Stock Exchange India S&P Nifty Korea Exchange KOSPI 200 Singapore Exchange Nikkei 225 Osaka Securities Exchange Nikkei 225 Tokyo Stock Exchange TOPIX TAIFEX TAIEX Singapore Exchange FTSE China A50 Hong Kong Exchanges HHI Hong Kong Exchanges HSI Singapore Exchange MSCI Taiwan Singapore Exchange SGX CNX Nifty TAIFEX TAIEX mini Australian Exchange SPI 200 Hong Kong Exchanges MSI Thailand Futures Exchange SET 50 Tokyo Stock Exchange TOPIX mini Bursa Malaysia KLCI Hong Kong Exchanges MHI BSE SENSEX 30 Total region
Volume 2013
Volume 2012
Net
233,860,478 192,408,350 75,056,225 48,110,825 39,087,816 30,907,691 22,714,121 22,693,270 21,906,479 20,871,257 19,580,330 18,357,967 16,079,671 13,093,325 10,329,090 7,853,800 5,688,404 3,156,452 2,678,309 2,252,621 2,115,169 808,801,650
130,443,680 105,061,825 80,061,861 61,269,882 27,994,913 19,523,347 15,192,439 49,284,764 10,022,496 15,923,813 20,353,069 17,183,604 14,719,166 31,961,020 10,025,717 8,545,847 4,034,460 2,148,039 2,482,314 1,560,515 8,907,335 636,700,106
103,416,798 87,346,525 -5,005,636 -13,159,057 11,092,903 11,384,344 7,521,682 -26,591,494 11,883,983 4,947,444 -772,739 1,174,363 1,360,505 -18,867,695 303,373 -692,047 1,653,944 1,008,413 195,995 692,106 -6,792,166 172,101,544
Top 5 Gainers Top 5 Decliners Product Net Exchange Exchange
Product Net
Zhengzhou Commodity Exchange Flat Glass
439,459,677
MCX-SX
US Dollar/Indian Rupee -127,736,863
Zhengzhou Commodity Exchange Rapeseed Meal
331,409,981
Dalian Commodity Exchange
Soy Meal
Shanghai Futures Exchange
Silver 303,915,314
Zhengzhou Commodity Exchange White Sugar
-92,181,658
Shanghai Futures Exchange
Steel Rebar
Dalian Commodity Exchange
-68,963,850
Dalian Commodity Exchange
Coke 164,781,504
226,332,898
-121,038,122
No. 1 Soybeans
National Stock Exchange of India US Dollar/Indian Rupee -53,815,107
Exchange
Product Volume
Top 5 Agriculture Futures
Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange
Soy Meal Soy Oil Palm Oil Corn Rapeseed Oil
Total
530,715,184 192,669,346 164,990,460 26,627,266 26,576,655 941,578,911
Exchange
Product Volume
Top 5 Commodity Futures
Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange
Flat Glass Rapeseed Meal Coke Pure Terephthalic Acid (PTA) White Sugar
Total
471,733,517 332,252,395 230,613,274 215,785,470 204,398,722 1,454,783,378
Exchange
Product Volume
National Stock Exchange of India MCX-SX Korea Exchange Tokyo Financial Exchange United Stock Exchange
US Dollar/Indian Rupee US Dollar/ Indian Rupee US Dollar US Dollar/ Japanese Yen US Dollar/ Indian Rupee
Top 5 Currency Futures
Total
566,399,936 423,589,258 51,814,466 20,120,943 14,530,838 1,076,455,441
Exchange
Top 5 Metal Futures Product Volume
Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Multi Commodity Exchange
Steel Rebar Silver Copper Gold Silver Micro
Total
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
587,457,858 346,445,222 128,591,712 40,175,648 33,611,357 1,136,281,797
Source: Exchange Websites
Exchange
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HEADING BUYSIDE
Asia’s Evolving ETF Landscape Asia Etrading held its 5th forum 17 October, 2013 in Hong Kong to discuss the growing ETF industry in Asia. Here is an edited transcript of that event.
PANELISTS Warren Deats – Director, Head of ETF Trading Hong Kong Bank of America Merrill Lynch Curtis Tai – Manager, Sales and Marketing China Asset Management Henry Glynn – ETF Capital Markets Specialist Vanguard Investments Hong Kong Jack Wang – Managing Director, Head of Sales CSOP Asset Management Mark Brady – Director, iShares Capital Markets, BlackRock
Asia Etrading: Who or what is driving ETF innovation in Asia? Curtis Tai: Asia as a whole has been growing significantly, it’s grown to over 550 products with an AUM of US$160bn+. However, there are still many different types of ETFs you can find in the US and Europe that you don’t find in the Asia-Pacific. Most of the large, popular ETFs, in Asia-Pacific still tend to be large-cap, blue chip, main indexes that we see trading. However, as investors begin to use increasingly more ETFs they will begin to look for more diversified investments, including thematic and different types of asset classes. We have begun to see that. We actually manage a China A-share ETF, which was made possible as regulation opened up. So as we see regulations open up, we will also see different types of ETFs. To answer the question of who drives this kind of innovation,
it’s really the investors. And as the investors start to develop their investment strategies in Asia Pacific, a lot of these investors and institutional investors are going to look to invest into different themes and countries, utilizing their top-down allocation and investment strategy. Jack Wang: Curtis makes a lot of sense, a lot of investors are using ETFs to do asset allocation when they actually invest into the market. But another point on Asian ETFs is that a lot of countries are restrictive with trading. It’s not very easy for people to get in and out. After the financial crisis, people are talking more about counter-party risk with derivatives, with swaps, where you face counter-party credit risk. ETFs are more transparent and people are more accepting of the instrument being very transparent and listed on the stock exchange. In Asia providing access to a market is very
important. That drives the development of the ETF market. The RQFII program opens the gate to China. In India and other restricted countries product providers are launching ETFs on the exchanges to provide access to the market. Not only is Asia evolving, it’s also the global asset allocation, and peoples’ desire to invest into emerging markets. The investment needs of global investors drive the Asia market. Warren Deats: Ironically, one of the biggest reasons that Asian-exposed ETFs took off in the US, was because the markets in Asia were restrictive. Once an issuer got their ID, investors could effectively ride off the issuers ID and start using the ETF for market access. And that really was one of the big bang factors for US ETFs with Asian exposure. The challenge is that in Asia you still have those restrictive regulations. However, we are seeing this change slowly. Hong Kong Exchange has expressed interest in really making the ETF product take off; Singapore is definitely doing it as well. For local investors in Korea, it’s become easier too. But right now it is still very much centered on index products and that’s what works; a product works if you have a strong ecosystem, if you have tradable futures around it, if it’s a recognised index. Of the US$160bn in Asia, approximately US$140bn is in things like the Nikkei and the Hang Seng Index. We haven’t gotten more complex than that yet. Sectors may be the next thing to take
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HEADING BUYSIDE
off, there is an opportunity in fixed income as well but we are not there yet. AE: Do you see the continued acceptance and popularity of ETFs in Asia? Mark Brady: What we really focus on when we launch products at BlackRock, is that we want to solve an investor’s problem. In the film ‘Field of Dreams’, there’s a quote: “If you build it, they will come.” That’s not currently the case with ETFs in Asia. You need to identify a problem that investors are facing, and then build a product that solves the problem. If you don’t, it is likely that you’ll end up with a product that gains little traction. In Asia, we’re fighting against a stock-picking culture, whereas in the US, it’s a mature investor base of both retail and institutional investors who are comfortable with ETFs. We see some of that in Australia and Japan, but broadly in Hong Kong and Singapore it is still very oriented to single-stock picking. ETFs are definitely gaining in popularity in Asia, however much more work on investor education is necessary. AE: Do you agree with that? Henry Glynn: The ETF market here in Asia is still very much in its infancy and there is a lot to do in terms of education. At Vanguard we encourage the use of core building blocks and strategic asset allocation. As Mark mentioned the stockpicking mentality will certainly be a hurdle and we hope that investor education will lead to more of a buy-and-hold approach in the region. That said, we have seen tremendous growth in recent years and with increased awareness of the benefits of ETFs I expect their popularity to increase. With this increased awareness we
expect to see a shift away from investor home bias, as investors would be better served by gaining international exposure through a more broadly diversified stock or bond ETF instead of single-country ETFs. AE: What types of ETFs do you see opportunities in? MB: In the United States, we’re seeing large volumes and increasing interest in fixed income, and we really think they are also going to become major products in Asia. We launched our fixed income ETF platform in Singapore two-and-a-half years ago and have seen quite a bit of interest in US dollar denominated debt, particularly high yield. These products are a good example of solving an investor’s problem: they offer access to a diversified portfolio of bonds which would normally only be accessible to institutional investors. JW: At CSOP we only trade China so we cannot tag on too many things. There are certain restrictions on the market and when policy is really trying to push them, I think the product providers need to be innovative. For example, the RQFII program providers are launching the equity ETF, but there are a lot of Rmb sitting on deposit. If you look at the onshore Rmb deposit rate vs the offshore deposit rate, or say the government bond rate, I’d say there’s certainly an arbitrage opportunity where you can get cheaper funding here offshore, and go onshore and make the arbitrage. Fixed income ETFs, make a lot of sense when there’s an arbitrage opportunity between offshore and onshore, simply because of the capital account restriction so, RQFII fixed income ETFs makes a lot of sense.
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CT: I completely agree with what Jack was saying. We also invest in mainly Chinese equities and fixed income and provide investors with that access. We’ve seen a lot of demand in fixed income and currency. While the Rmb is openly traded in CNH, a lot of these traders want access to onshore rates, onshore CNY, onshore currency. If our fund is denominated in Rmb but they are trading in CNH, that’s a cost for them. Additionally, for them to exchange into CNH constantly is costly for them. AE: Warren, what are your clients saying? WD: From the sell-side perspective, I totally agree. There are two near term opportunities for the industry. Fixed income is the first one and there is a huge opportunity there. We believe very strongly that this is an important next step in the product and have recently hired a dedicated Fixed Income ETF expert in the US who has built linkages across Equity and Fixed Income sides of the business and the increase in flow has been pretty incredible [as a result]. The challenge is for the sell-side to for us is to get up the curve as well. With equity baskets you can get to a close-enough hedge, but unfortunately with a lot of the fixed income baskets, they’ll be made up of 50 instruments but the minimum trading size might be US$250,000 and somebody only wants to trade US$3 of the product. The second opportunity is sector ETFs. We have seen sector ETFs list before and to say they flopped, would probably be kind to them, but going forward, I think people are starting to think about the sector space again. It all ties back into transaction costs, and market regulations and market times. Little things will help, like in Hong Kong, less than 40% of the ETF with HK underliers means you don’t attract
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BUYSIDE
stamp tax. Markets moving to more aligned hours with shorter or no lunch breaks will also help. I say fixed income is first; equities sector ETFs second. AE: We’ve heard a little bit about some of the favourable markets to issue ETFs or some of the markets that aren’t so favourable. Which markets make ETF issuing and developing more or less favourable than others? MB: We have products listed in four places in Asia: Hong Kong, Singapore, Tokyo and Sydney. In each region there are different challenges that we face. We have 15 funds in Hong Kong, 8 funds in Singapore, 26 funds in Australia, and 4 funds in Japan. Regulators are warming up to ETFs, but at the same time because of the large retail investor focus, there’s a lot of concern that investors understand what they are buying. Regulators want to make sure ETFs are products that retail investors can understand, they are transparent, and investable. Each jurisdiction has its own challenges, and also its own rewards and we work closely with regulators across the region as well as the US and Europe to ensure an open and constructive dialogue around our products. AE: Is there a market for actively managed ETFs? WD: Yes. It’s very small at the moment. Where we are seeing people becoming more interested is hedge funds having their own ETFs that you can invest in. Well-known managers, good track-record funds allowing you to invest
in an actively managed ETF, I think that’s an opportunity. I think pseudo-active, where there are a couple of changes every six months, every three months, isn’t really something people are demanding. We are getting a lot more questions around them. It just happens to be a much easier way to access hedge fund alpha. It’s been held back in the past few years, in that it’s been a beta-driven market. Alpha returns have been hard to come by recently, but as we move back into a stockpicker’s market, it will definitely be something that will be taken up. JW: For a lot of asset allocators using a benchmark, a lot of the instruments, including ETFs, have a feed out that makes you underperform the benchmark, whatever you invest in it. I see some semi-actively managed ETFs being demanded. A lot of real money is invested in Asia moving away from, for example, a pure index swap to an index-plus swap product, where they generate some outperformance from the collateral they pose. It’s difficult for allocators to say, “I invest in that, but I naturally underperform,” because of the fees, because of tracking errors. There were products launched in Europe that were very successful. There are hedge fund products where you can have a persistent outperformance of the index. HG: Transparency is an issue when it comes to actively managed. I also think the market needs to mature quite a bit before we are ready for actively managed ETFs in Asia. It makes sense in the US, which is much more developed and investors already have a whole suite of products to choose from across various issuers.
AE: We’ve heard some of the challenges for constructing and creating ETFs in Asia. What are the biggest challenges? WD: What I found when we discussed products with clients, especially when we are going in for a creation of any sort, is that any time you place a caveat or a ‘but’ in the sentence when they are doing something, you scare them away from the product. A key is the cost around creation. People are used to creating in the US, where it costs nothing to execute, the actual fees charged by custodians are tiny in relative terms and the execution of the basket is simple, whereas in Asia you suddenly start piling on stamp tax, you then pile on the fact that you sometimes only get your currency execution a day later, you add the fact that certain markets have difficult closing mechanisms, so you miss the closing price. Suddenly you start to have these deviations away from NAV. You have these restrictions that you can often only do cash creations, which means you only create on close for certain ETFs. Each time there’s an additional layer of complexity around a product it makes people shy away from it. Another issue is when we do try to do multicountry ETFs, is creation times, when the cut off time is 10:30am. You’ve made no decisions besides maybe what coffee to have by 10:30 in the morning and you have to pretty much make a pan-Asia decision. So all of these things create additional complexities. Additionally, borrow can be a problem. Sitting on the sell-side and if a client wants to buy US$50 million of an ETF, I’m happy to sell it to them and place a little bit of a premium on the price for my own risk. The problem is, if I can’t borrow the ETF, I can’t sell it to them. So you get this additional
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
BUYSIDE
log jam, of not being able to execute the ETFs and, as I say, each time when we get to that “but”, and “if”, it really makes people shy away from it. HG: Hopefully, Warren can decide what coffee to have after 10.30am! This is the cut off for creations and redemptions on 2805, our FTSE Asia ex-Japan ETF. Joking aside, there are a number of challenges with Asia and Warren has touched on a number of them. Restricted markets are an issue and time zone differences can be a challenge when constructing products with a global focus. WD: Liquidity is a big issue. It often comes up when I speak to clients. Often clients will look at the screen and say, “well, the ETF trades 1,000 shares a day, this isn’t liquid.” Eventhough the underlying basket ends up trading a US$1 billion a day. Its not only traders who focus on this, It’s also very difficult to get their risk managers and risk controllers over the line as well. We thought this was actually insurmountable; it isn’t. A lot of our clients now have either actually called ETF issuers to speak to the risk controllers, or we’ve gone in to explain the process and show how underlying liquidity is actually the most important factor. AE: What should custodians be doing to help? CT: From our side, one of the greatest issues, I think, with managing ETFs in Asia, is actually with the creation and redemption side. For a lot of us, we have many market restrictions and regulatory issues that we have to go through. For every single hurdle that we’re passing, we have to sacrifice a little bit of the creation and redemption process, which makes Warren’s job
very, very difficult, and for the market makers, and the whole ecosystem in general. MB: In Europe we’ve done some great innovation with settlement for funds with multiple listings – you trade anywhere and settle in one location. We’re also moving toward a consolidated ticker to give investors a true picture of an ETFs daily traded volume. There’s also the concept of passporting. We’d love to bring our best funds listed in the US and Europe to exchanges in Asia to properly leverage their popularity, instead of having to create similar funds and adversely fragment liquidity. It’s this kind of innovation and support we are looking for in our custodian relationships.
“One of the greatest issues, I think, with managing ETFs in Asia, is actually with the creation and redemption side.”
HG: A follow-the-sun approach from custodians would definitely help everybody involved, especially those of us who are multi-regional. WD: From my side, if I have a question around the creation and redemption process, I never really know where to go or how to contact the custodian. The custodians should be marketing their services in a more user friendly way. It would be great to have better contact with them. Often the questions are around FX transactions that appear to be away from the market or expensive in relative terms or around those restrictive cut off times; there are a lots of buffers in the systems to make sure nothing goes wrong, which is obviously the right thing to do. But sometimes it can be overly conservative, and maybe they are not incentivized to improve that process – I think that’s very fundamental for the industry to take off and will be to the benefit of the issuers, custodians, and the investors.
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
In Partnership With
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REGULATIONS
One country, three systems The newly inaugurated Shanghai free trade zone is a hot bed of financial policy reform, and offers a glimpse of liberalised China’s future
T
he long wait for full liberalisation of China’s financial market appears closer to an end, since a vision of that future began taking shape in a small area of Shanghai where finance regulation around capital account, renminbi and interest rates, is being relaxed. The Shanghai free trade zone (FTZ) is a policy incubator, where reforms will be tested prior to being rolled out nationally. The paths the country will take are only just emerging from the fog with the People’s Bank of China (PBOC) issuing in early December its opinions on the new measures, which will be implemented in two months.
Portfolio flows unleashed “It’s an important prelude to nationwide reforms,” says Dariusz Kowalczyksenior economist Asia ex- Japan, at Crédit Agricole, a French bank long active in Asia. “It’s also very important because of the magnitude of the reforms that are being tested, in particular liberalisation of portfolio flows. So far it’s on a very broad scale in terms of who can invest in securities in China, but the size of those investments, not capped by a specific number, is tripled by the setup.” He explains that all foreigners and Chinese who live in the Shanghai FTZ will be able to buy securities in China, but they can only do it using the incomes they earn in the zone. “They will be able to invest offshore without a pass, but will have to generate income in the zone to pay for those investments,” he says. “Foreign institutional investors that set up in Shanghai will be able to buy securities in Shanghai, but only with income earned within zone. There is no cap, as with the QFII and RQFII programs. The restrictions will gradually lose significance as earnings in the zone increase.” Launched in 2002, the QFII program licenses foreign institutional investors to trade A-shares. However, investments are capped using a quota system, and the repatriation of funds is heavily restricted. While the quotas are increasing, the Shanghai FTZ bypasses the system altogether. With fewer capital control restrictions in the zone, the flow of money will be eased, reducing trading costs, and facilitating the creation and redemption of ETFs, for example.
The financial services industry stands to make great headway in the zone, with commodities favoured by the industry in mainland China. Zennon Kapron, founder and manager, Kapronasia, a provider of independent research, says, “We think there will be quite a lot around the FTZ in commodities. We are already seeing some hedge funds with greater focus on commodities set up in the free trade zone; commodities – and derivatives around commodities – will be an important part of that.” The Shanghai Futures Exchange (SHFE) has set up the Shanghai International Energy Exchange, the country’s fifth futures exchange, in the zone. The new exchange will trade SHFE’s crude oil futures contracts, and other existing oil, asphalt and energy futures, and offers technology, delivery and clearing services. Though the exchange is an important step towards freeing up China’s futures trading environment, authorities have their eyes on an even bigger goal: turning the exchange into Asia’s premier energy trading centre.
Capital account liberalisation Meanwhile, capital account flows are being opened up in many different areas, which brings the country closer into line with international free market practices that allow the free flow of money around the world. Chinese capital investment abroad will be allowed without the need for approval, although registration is required, liberalising capital account outflow. On the inflow side, a negative list restricts capital spending, though it is likely to be reduced gradually. The ability to move money in and out of China far more easily will reduce the cost of doing business, increase trading agility and will likely see Chinese investment in foreign securities and foreign investment in Chinese securities increase. The potential impact of capital account liberalisation is enormous. A recent Bank of England bulletin estimated that capital account liberalisation and international financial integration by 2025 would see China’s external assets and liabilities rise from under 5% of world GDP today to over 30%. Not everyone sees the zone as a showstopping reform gambit. “Because the financial sector is so different from the manufacturing sector, this side of the
By Steve Price
Qinwei Wang China Economist
Capital Economics
“The regulator will be very cautious in the future on how to prevent arbitrage opportunities.”
FTZ looks much, much different from Shenzhen, for example, 30 years ago. The impact of reform may be limited in the pilot scheme,” says Qinwei Wang,China economist at Capital Economics. “The authorities will try out some policies in the zone, but they will be limited to a small area, and the regulator will be very cautious in the future on how to prevent arbitrage opportunities.” “Of course if the exchange rates are different in the Shanghai zone and the rest of China there will be arbitrage,” says Kowalczyk. “You shouldn’t have different prices in different places.”
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REGULATIONS
Renminbi A focus of reform is promoting internationalisation of the renminbi. In the zone, institutions will be allowed to handle cross-border renminbi transactions, provide renminbi clearing services, and borrow renminbi funds offshore. “If you think of the Shanghai FTZ as an offshore renminbi centre, just like any other offshore centre, but in China, it’s part of the internationalisation process,” says Chin-Ping Chia, managing director and head of Asia Pacific Research at index provider MSCI. “It’s just one piece. The important issue is getting more countries signing bilateral swap agreements, eventually making the renminbi convertible in those locations, where it expands from there.” In two months, most of the zone reforms will be implemented. Within the following six months the results will be assessed and the year following that a replicable model will be created for other parts of China. Within two years authorities will be ready to transplant the Shanghai experience to other FTZs. On the national front, the target is major progress by 2020. Perhaps the least radical reform in the zone is interest rate liberalisation, which will be pursued gradually. Institutions in the zone will be able to negotiate certificates of deposit, and the removal of the ceiling of the deposit rate for foreign currency accounts is likely in the near term. “If you look just at interest rate reform, we’ve seen them change a lot. They removed the floor on the loan interest rate, so they just have to address the deposits and then they are pretty much good to go on that side,” says Kapron.
End game While the reforms are seen as an important step to the easing of national controls, the transition from free-trade zone to the country is not without hurdles. As Beijing loosens the screws on the country’s financial market and finance industry, it must navigate the monetary impossible trinity, tackle vested anti-reform elements, especially at domestic banks, and at the same time ensure market and social stability, as well as guard against GDP growth leaking out through the zone. Obstacles to reform include the “health and competitiveness of the domestic players,” says Chia. “At the top of any regulator’s mind would be consideration of whether domestic players are strong enough to compete against foreign entrants. Another obstacle is the ability to deal with shocks to the economy. If you want to completely open, you have to be certain you can take whatever foreign shocks or monetary movements occur.”
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WHAT?
The Shanghai Free Trade Zone, the first of its type in China, covers 29 square kilometers and comprises four bonded zones.
WHY?
Chin-Ping Chia Managing Director and Head of Asia Pacific Research
MSCI
“At the top of any regulator’s mind would be consideration of whether domestic players are strong enough to compete against foreign entrants.”
Besides, the free-trade zone may serve its purpose in the near term before becoming obsolete in the wake of countrywide reform. “The FTZ might only exist for a short time, but it will be a catalyst for further reform of the financial sector in China,” says Xia Le, senior economist, BBVA Research.
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
The zone is being used as a policy incubator to hone reforms that will eventually be rolled out in other parts of the country. l The reforms in the zone are seen as steps towards balancing the economy, increasing Chinaís competitiveness, expanding FDI and trade, liberalizing the countryís capital account, full renminbi convertibility and internationalization of the currency, and interest rate liberalization. Deepening reform will see China become more integrated into the global economic system. l Though China doesnít qualify for membership of the US-led TransPacific Partnership, the free trade zone has been touted as the country’s attempt to gain access to the emergent group. l The government aims to create a global offshore financial market in Shanghai, which would be a major step towards the city developing into a global financial center, perhaps even rivaling Hong Kong.
HOW?
Reforms in the zone are wide ranging. In early December, the Peopleís Bank of China issued an opinion on financial reform in the zone. l Inward and outward FDI will be relaxed. l Special accounts in the zone will be allowed full convertibility of the renminbi. l The currency settlement processes will be simplified. l Entities in the zone will be allowed to raise reminbi funds outside of China. l The Peopleís Bank of China intends to, incrementally, let the market determine the interest rate in the zone. l Institutions in the zone will be allowed to trade securities on Shanghai exchanges without having to apply for a license. l Entities in the zone will be allowed to issue reminbi bonds. l Chinese living in the zone will be allowed to invest abroad without restriction.
WHEN?
Officially launched on 29 September, the zone will take 10 years to construct, but pilot reforms, which were announced early December, will be rolled out in two months.
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OPINION WHO’S WHO & ANALYSIS
Hans Sicat Asia Etrader spoke with Hans Sicat the CEO of the Philippine Stock Exchange and the recent developments in its growing market. He discusses the ASEAN link, algorithmic trading and hosting, the impact of global regulations domestically, how the exchange is fostering the local market, its priorities and products coming to market.
Asia Etrader: How did you get started in capital markets? Hans Sicat: I was at the University of Pennsylvania working on my PhD in economics when I was recruited by the strategic planning department at what was then Citicorp in New York. I embarked on a rotation training program in New York and was rotated into a part of the bank that was then focused on emerging markets – Latin American corporate finance. It was the days of the old debt-to-equity exchanges and trades, and trying to work off the Latin American debt problem, which was very interesting. I then moved into a team at Salomon Brothers, and relocated to Hong Kong, before opening the company’s office in the Philippines. I volunteered to come here, and fortunately the board agreed. Then I moved to the exchange as a board member, and ended up on the board of the exchange. We lost two CEOs in succession, and I took over the position. AE: How is the exchange supporting and improving liquidity? HS: Our game plan is to introduce new products and services. The Philippine Stock Exchange, despite operating through its legacy firms for some time, has not really gone the way of the other exchanges, where there has been a lot more product development. For 2014, we’re focused on bringing in new products and services. We’re still trying to encourage more listing, whether it’s IPOs, or doing a lot more trades through the exchange. The Philippines is primarily a debt market, and a bank debt market; so we are trying to convince a lot of
issuers that going through the capital market is actually a great alternative to going to a commercial bank relationship manager and drawing down a loan. In terms of regulatory functions, we’re trying to be a lot more userfriendly on many levels. This year, we’ve tried to simplify our listing boards. We used to have three boards, and now it’s just the main board. We also have an SME board. One of the things the Philippines is known for, is mineral and natural resource and energy companies. Mining used to be a large part of the economy. There has been a relatively limited amount of issuance of junior miners and junior energy companies, and that’s
“For 2014, we’re focused on bringing in new products and services.” because our track record requirements have been quite steep and tough. About 12 months ago we therefore introduced, at least for the renewables side, a one-year track record for listing requirement, and the government will certify the company has the technology and maybe the location to mine, and the authorization to do so. The most interesting metric I look at is the growth of average daily trading volume and value.
“In terms of regulatory functions, we’re trying to be a lot more user-friendly on many levels.” Despite the fact that we are small, I think over the past two, three years, we’ve had a great run in terms of trying to increase growth almost every year by around 4050%. In January-October trading value is up about 50% YoY, and we hope that continues as we think it’s the best indicator that both local and foreign investors are piling into the market and actually creating activity. AE: What new products does the exchange have in the pipeline? HS: First is a locally created exchange traded fund (ETF) based on the PSEi, which is a Philippine index. Second, is an index future contract, which is co-branded with Singapore Exchange (SGX) and has been listed in Singapore. In November we announced our first Sharia list, which is a precursor to the Sharia index. The list addresses the longterm desires of investors, both institutional and retail, for Sharia-compliant companies. We’ve engaged a third party provider to
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
OPINIONWHO’S & ANALYSIS WHO
“…we’ve had a great run in terms of trying to increase growth almost every year by around 40-50%.” work through the filters. The list is the first step in that process. We will support that by ensuring there’s enough short selling and borrowing activity. The main constraint in the Philippines has been supply of stock. It’s been mainly used for avoiding trade fails. We have been working with the Insurance Commission to pass rules for insurance companies with portfolios to start lending even the most liquid components of the PSEi. We hope this will occur by next year as it will be a big boost for anyone trying to manage a fund; obviously they need the ability to have an appropriate hedging strategy.
There are more jobs, more of the younger crowd are coming into jobs, and there is more disposable income. We’re hoping to attract that type of investor. AE: Is the PSE planning to offer colocation and hosting to its members? HS: We already offer co-location services. It’s something that’s not as popular as in developed markets, mainly because the latency question is not as important. Emerging market participants can get in and out without the fear that someone hits the trade before them. However, a few have physically co-located their servers in our data centre. This will be a bigger business in the future. As the Philippines becomes a much larger capital market, there will be more participants. AE: What is your opinion of algorithmic and high-frequency trading? HS: Its adoption will increase as the markets increase in size for the simple reason that people want to get in and out faster. We are aware of the extra volatility that can be created in times of distress. But we have circuit breakers and we have not been subjected to the same types of issues, e.g. the flash crash, that we’ve seen elsewhere. We will review what happens around the world in terms of regulation, and
AE: Why did the PSE select N2N as a technology partner? HS: We launched a private label online service bureau, for brokers and dealers of smaller size who would not spend money on R&D or technology. We decided that the exchange needed to step in and invest. We are, at least in theory, able to spread the cost over a wide range of clients, which lowers cost per unit. We held a global building contest. N2N was short-listed. They could do the job for us in a cost effective manner. There are two relatively small broker/dealers who are now generating clients, and a larger institutional client is set to join. Other broker/ dealers are interested as this approach avoids the headache of developing and/or maintaining their own systems, and it has the blessing of the PSE. We aim to help grow the retail market. The market for those who are early starters in the online space is growing between 40-45% per annum in terms of sign-ups. So it’s a huge rate of growth. Small numbers right now, but these guys will be the more active investors of tomorrow, especially in the Philippines, where there is a demographic dividend. www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
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to the extent that it becomes more relevant to us, we will have to say what the exact interactions that we as an exchange will allow or not. As a junior exchange, in terms of DMA, we’re just at the sponsored DMA level. We realise direct connect is probably the way of the future, but we’re not yet ready
“The main constraint in the Philippines has been supply of stock. It’s been mainly used for avoiding trade fails.” to address all of the problems associated with it. We’re beginning to study them. We’ll deal with it as our own market grows. In terms of prioritising the more difficult questions, which for us are bringing in more issuers, and bringing in more products and services.
28
HEADING WHO’S WHO
“We already offer co-location services. It’s something that’s not as popular as in developed markets, mainly because the latency question is not as important.” AE: Recently, the levels of required margin held at the clearinghouse was changed; what kind of technology was employed to facilitate this? HS: For that risk management reform that took place for the cash market in Hong Kong, we mainly modified existing technology on the clearing side. In the cash market our clearing system, CCASS, is a home-grown solution that has been around for quite some time. On the derivatives side, we are using
NASDAQ OMX technology, it’s something we call DCASS. We are upgrading that to the Genium INET platform, again in the later part of this year. All the market conformance testing activities, all the market rehearsals have been completed successfully and we are looking at launching both the Genium INET trading and clearing in the next couple of months. AE: What is your view of dark pools and alternative trading venues? HS: We see them around in the region. They serve a purpose. The one concern we have, and this may be an overreaction, is that compared to an exchange like the PSE, where we have regulatory responsibilities, dark pools probably have the advantage in terms of lowering costs, but not having the appropriate responsibilities to the SECs, or that type of reporting line. They probably will continue to serve a purpose by providing access, and execution for some investors. However, I think some of the responsibility has to be shared in the future. AE: When is the PSE expected to connect to the ASEAN Trading Link? What are the benefits? HS: We don’t have a specific schedule yet, but we’ll need one necessary condition before we get there. We are trying to increase product and services to make sure they are
comparable to some of our colleagues in the region. The necessary condition we require is that our own Securities and Exchange Commission (SEC) signs up to what’s called a mutual recognition of institutions and regulations. That simply means that if something is approved by SGX and SingTel is an issuer, the securities that SingTel issues should be viewed as appropriate and good to be traded by investors in the Philippines. Right now we have local regulation that
“We realise direct connect is probably the way of the future, but we’re not yet ready to address all of the problems associated with it.” says you can only buy and sell securities that are recognised by the Philippines SEC onshore. The technology connection is already there. However, current regulation means that only one-way trades outwards can happen. That’s not going to be much of a market for us, and perhaps it would be counter-productive. We’ve been lobbying the regulator to understand the situation. I think they are coming around to it. The other thing for them is they realise that the ASEAN general platform opens in two years. It’s happening in goods and services, and human capital, and some level of financial capital moving back and forth; so this would become paramount. If they don’t approve something like this, it actually constrains Philippine investors and participants from benefiting from the larger ASEAN grouping. AE: Do you think that Asia exchanges will move to interoperability or keep clearing separate? HS: Maybe the second generation model of ASEAN exchanges will have a central clearing house. For the time being it will continue to be separate. First, you need to loosen various SECs, which control different things. Once that happens, then maybe a
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
WHO’S HEADING WHO
29
“[Dark pools ] probably will continue to serve a purpose by providing access, and execution for some investors.” central ASEAN clearing house or depository might be the way of the future. Right now, I don’t think that’s in the cards. AE: What are the exchange’s overseas plans? Are there any alliances? HS: We’ve been doing this by working on products and services through collaborative efforts, which is the same thing we are doing with the ASEAN initiative, marketing ASEAN as an asset class; hopefully it ends up being the ASEAN link for us as well. Both Bursa Malaysia and IDX assisted with the Sharia idea in terms of how to create something like this. SGX has been helpful as they are our partners in the Philippine Dealing System, which is a fixed income exchange; we are co-owners. We’re trying to figure out what the best model is for the depository, whether it ends up standalone or in the PSE. We think it should be part of the PSE. With the derivatives products we are working on with SGX, the approach we’ve adopted is to say we can’t do it alone on certain products and it’s probably best to partner up with somebody who knows what they are doing. Korea Exchange has provided us with their surveillance system. On 15 December we rolled out PSE Edge, an online reporting system from issuers. It’s now a much more reasonable template, and makes it easier for the user, ie. issuers, to tell us what’s happening in terms of their day-to-day disclosure. Importantly, it’s linked to our trading engine and our information system, so that it should go to our website. The headlines feed to servicing in real time the whole investor base that is looking at PSE.
early, which has created a bit of a ruckus. The flipside there is you can be assured that the universal banks are probably the best capitalised in the world as the result of complying. There’s been a lot of fundraising to try and beef up equity capital. The thing that’s annoying is regulation like FATCA and anti-money laundering rules creating issues even at the exchange level. You bring in effectively US regulation by imposing certain rules and procedures, which doesn’t mean Philippines institutions are going to go bad, but they may not fit the bill. We think it’ll increase the cost of doing business across the board. We are trying to be reasonable about it, and we are trying to have a dialogue with the appropriate powers, but it seems the world is moving there so it’s a question of making sure that the technology that tracks all of this is at least developed or put in place in a more affordable situation as opposed to everyone getting fined left right and centre. Let’s be reasonable. Some of these guys do the sophisticated stuff, they will outsource it to one of the banks, which if you read the regulations is not how it’s supposed to be done. They could be fined for doing that, even though that’s a practical solution. The Philippines is a centre of outsourcing and some of these outsourcing solutions need to get tested across these regulatory requirements.
AE: Is the Philippine electronic trading industry affected by the global regulations such as MIFID and Dodd-Frank? HS: In the financial services industry, Basel III is being implemented by local banks a year
AE: Does you see opportunities in OTC clearing? HS: Today in the Philippines the fixed income market is more or less OTC-like, even though it’s reported on exchange after the trade is done. It’s a question of
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
what’s the appropriate model. We think that the trend will be to do more and more on exchange, and how to move to this model is being debated in the fixed income market. Where we are not yet at, is having standard sizes and standard contracts. It’s just a reporting mechanism today, and I think that will continue until those standards are developed; it’s not one of those things you can just mandate and it just happens. AE: Has there been any interest from international institutions to access the PSE? HS: There is an increasing amount of interest, perhaps driven by the economy, which is growing at an unprecedented level. We are considering whether we should become more active participants in the ASEAN link model; that would be the easy answer. We are also considering having more dual listings, if access isn’t direct. We’re also trying to do a bit of the reverse. We are suggesting to some of the Philippines companies that have listed in Toronto, Sydney or London, that they may want to dual list in the Philippines. There was a first case recently where an SGX-listed company was dual listed in the Philippines. They started doing more fund raising in the Philippines. AE: What will electronic trading in Asia look like in 5-10 years time? HS: Certainly more robust. If I relate the issue to ASEAN economic integration, if it happens not in two years, then in five years, it will only increase the requirements to move to more and more electronic platforms so that all these trades can be handled.
30
OPINION
Are you ready for the HK SFC’s new electronic trading requirements?
H
ong Kong’s regulator, the Securities & Futures Commission (SFC) has recently asked the industry to ensure that algorithms used for trading are properly checked and tested before being deployed and that the end user is qualified to use the algos in the manner in which they were intended. The regulations do not specifically spell out the nature of compliance leaving room for interpretation. The buy-side is believed to be reducing its broker panel given the burden of compliance across several brokers which they customarily do business with. The intention of the regulator is to preempt any market disruptions caused by ‘algos gone wild’ which is commendable but complying is no small feat. We, therefore,
wanted to get a sense of whether or not Hong Kong’s electronic trading industry was ready for the SFC’s new rules. The results were surprising, with nearly one third saying that they did not think they would be ready. It is not clear what the penalties will be for non-compliance but this group could be in trouble and subject to reputation risk if an event occurs however small it may be. The 21.95% that said they weren’t aware of the new requirements may also be leaving themselves exposed. Only 12.5% of all respondents said they were absolutely prepared for the new algo policy and 26.83% believed they would be prepared by the deadline. That suggests just under 40% of the industry is ready to comply with the new regulations.
The regulator originally announced in March 2013 that it intended to bring about these rules to be enforced in the New Year but by our measure, not everyone is either ready or taking the rules seriously. The ability of the rules to prevent negative market events remains to be seen. Technology is not infallible and it is inevitable that eventually there will be a market event caused by an errant algo but because the rules are not determinative the regulator will have to make a judgement as to whether the offending technology provider did in fact comply or attempt to comply. Despite significant time and energy invested to ensure complince in many firms, we still expect the regulator to hand out a fine and a public reprimand.
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
OPINION
31
What asset classes will you be focusing on in 2014?
A
t this time of year it is always nice to get an idea of trends in our industry in order to invest in appropriate resources and plan accordingly. We ran a poll in order to do just that asking what asset classes will you be focusing on in 2014. For the most part it seems that there is no standout asset class but a broad interest across a good many of them. Futures at 26.32% did come in ahead of the rest though not by much. Hedging and arbitrage are drivers for this asset class. We are seeing more derivative products across Asia with SGX focusing on index flavours, the HKEx and LME takeover of course, Japan has seen improvement at TOCOM, TFX and JPX, Bursa Malaysia’ FCPO contract is gaining
traction and Thailand is getting into the game as well. Cash, FX and OTC all came in a close 2nd each garnering 21% of the votes. Asia’s cash trading in 2013 grew by over 40% lead by China and Japan as the second and third largest economies move to prime their respective pumps and see a return to real growth. FX is probably not a big surprise with Japan having the world’s largest retail market and Singapore as the third largest market surpassing Japan. FX will likely continue to be a viable asset class for the trading industry into the foreseeable future. OTC has been a focus for quite some time but in the last half of 2013 has Asia really started to bring in clearing and risk
management to this asset class with Singapore, Australia, Korea, Hong Kong and Japan all throwing their hats into the ring. OTC trading in Asia is around 10% of global flows but is expected to grow as the region continues to do so. Coming in last was fixed income. Not really a surprise. Asia’s bond market is relatively small, though growing in China, and with interest rates looking to rise as the US Fed’s quantitative easing winds down and Japan continues to pump money into its economy, fixed income as an investment does not make sense. Additionally, with markets at all time highs there will likely be a flow of money out of fixed income from those who wished capital preservation and into the equity markets.
Visit: http://www.AsiaEtrading.com/opinion-polls/ Vote on the latest Opinion Poll
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32
O&A
The India Story – an attractive destination for global traders By Sandeep Tyagi, Estee Capital LLC
I
ndian capital markets present an attractive opportunity for global traders, market makers, and hedge funds. Indian exchanges rank amongst the top five globally in terms of number of contracts traded across equity, equity derivatives, and index derivatives segments. Volatility across Indian indices is higher than Asian peers and the top 350 securities are highly liquid. Market inefficiencies continue to remain high and the resultant wide spreads have enabled algorithmic and high-frequency trading. The evolution of Indian markets over the last decade has been remarkable. Securities & Exchange Board of India (SEBI), the market regulator has adopted a consultative approach and involved market participants in policymaking and has guided the market towards adoption of global standards and world-class technology. Electronic trading has evolved to about 50% of overall trading volumes and there has been 50% improvement in data and speed of execution. Over 100 brokers are co-located with the major exchanges. Competition amongst exchanges has also intensified. Technology infrastructure across exchanges is being upgraded and trading costs have come down. Further, exchanges are attempting to increase liquidity beyond the top 100 securities and are offering market-making incentive schemes. These incentive programs make the space very interesting for high frequency traders. Global market-makers, hedge funds, financial institutions, and asset managers are already present in India and are beefing up their operations. SEBI also launched a platform for hedge funds that enables them to take leverage. There are several opportunities for algorithmic and high frequency trading firms to apply skill, knowledge and success from developed markets in India.
Volumes Indian exchanges have overtaken developed markets and are ranked amongst the largest exchanges by number of trades in equity shares in the cash segment. Both NSE and BSE ranked amongst the top 5 exchanges globally in number of traded index options. 2012 was a challenging year across exchanges for index futures, and in spite of a
facilities for 200 racks. Latency has been minimized significantly and the system can handle 2 billion order messages per second. Competition in the exchange landscape is driving the market further towards improved technology infrastructure and lower costs. NSE has reduced rack hosting charges by half in 2013. Transaction charges on MCX-SX are 36%50% lower, and NSE slashed deposit charges for proprietary trading members. Exchanges have selectively waived off transaction charges in order to drive ETF growth. In an attempt to further enhance liquidity and extend it beyond the top 100 securities, exchanges are offering incentive programs to market makers where brokers and market makers are given volume-based incentives for a specified period of time to bring in liquidity in securities which have limited trading activity.
Entry of Foreign Players 30% fall in volumes, Indian exchanges ranked 5 amongst global exchanges in number of index futures traded.
Spreads and Trading Avenues in Indian Markets There are about 1750 securities traded on Indian exchanges and 350+ are liquid. Market inefficiencies are high which results in higher bid-ask and arbitrage spreads that can be exploited by market makers. Fig.1
Growth of Algorithmic / High Frequency Trading in India
GETCO, one of the largest automated traders in the world, received regulatory approval in March 2013 to set up its operations in India. Tower Research Capital already has a presence in India. Amongst hedge funds, D.E. Shaw has been in India for a decade and financial institutions such as Goldman Sachs, Deutsche Bank, HSBC, J.P. Morgan, Morgan Stanley, and Pinebridge already operate in India as mutual funds. Global asset managers have Foreign Institutional Investor licenses and trade actively in India or are joint venture partners with mutual funds and life insurance companies.
Regulatory Costs in India
Recognizing the benefits of algorithmic trading, SEBI and NSE/BSE offered direct market access (DMA) in India in August 2008. NSE, BSE, MCX, and MCX-SX provide co-located services and there are well over 100 brokers colocated with the major stock exchanges. Fig.2
In a welcome move, the Finance Ministry brought down the Securities Transaction Tax from 0.017% to 0.010% on the sale of equity futures, which is expected to increase market depth, liquidity and volatility starting June 1, 2013. Fig.3
Evolving Exchange Landscape and Improved Technology Infrastructure
Modes of Participation for Foreign Players
Over the last three years, there has been ~ 50% improvement in data and speed of execution, through availability of tick-by-tick data and improved market depth. NSE is continuously investing in technology, and has co-location
In order to invest in India, all foreign portfolio investors need to register with SEBI under any of the investment categories: F Foreign Institutional Investors (FIIs): FIIs typically include hedge funds, pension funds, mutual funds, financial institutions,
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
O&A
33
Fig.1
Segment
Exchange
Listed Securities1
Daily Avg Vol Spreads2
Equities
NSE, BSE, MCX-SX
1,600+ securities; 500 liquid; 200 very liquid
$1,950+ MM
4-5 bps
Futures NSE, BSE, MCX-SX
About 180 securities; about 90 liquid
$5,300+ MM
3-4 bps
Options
NSE, BSE, MCX-SX
About 50 liquid
$18,800+ MM
2-4 bps
Currencies
NSE, USE, MCX-SX
4 currencies
$3,900+ MM
0.5 bps
35 commodities traded
$33,700+ MM
0.5-1.0 bps
Commodities MCX, NCDEX, NSM
“Indian’s market microstructure offers opportunities for global
Sources: 1: NSE, BSE, USE, MCX, MCX-SX, NCDEX 2: Estee analysis since April 2012
traders, market makers, and hedge funds to
Fig.2 November 2013 – Mode of Trading in NSE1
Mode of Trading
Cash Equities (% of volumes)
Equity Derivatives (% of volumes)
Algorithmic Trading
16.43%
5.29%
Direct Market Access
0.74% 8.54%
Co-location
18.64% 29.38%
Internet Based Trading 11.87%
set-up shop”
10.58%
Mobile
0.75% 0.40%
Smart Order Routing
2.25% 0.00%
Total Electronic
50.69% 54.19%
Total Non-Algorithmic
49.31% 45.81%
Sources: 1: National Stock Exchange
Fig.3
Nature of Charges
Cash Market
Futures
Delivery Intra-day
Buy
Options
Sell
Buy
Sell
Exercised
Statutory Costs Stamp Duty
0.300 0.300
0.300 0.300 0.300 0.300 0.300
Securities Transaction Tax
10.000
1.250
0.000
1.000
0.000 1.700 12.500
SEBI Turnover Fees
0.010
0.010
0.010
0.010
0.010 0.010 0.010
0.325
0.325
0.190
0.190
5.515 5.515 5.515
Trading Costs
Exchange Transaction Charges
and corporates. To qualify as an FII, the entity needs to have a track record in its domestic market, should be regulated by an appropriate foreign regulatory authority (such as SEC), and have a certain minimum capitalization F FII Sub-accounts: This includes client accounts or funds / schemes managed by FIIs F NRIs/PIOs: This route is only available to persons of Indian origin residing abroad F Qualified Financial Investors (QFIs): A new route that enables direct investment into mutual funds and certain other qualified investments by eligible foreign investors
Future of the Algorithmic /HF Trading Space in India The proportion of automated trading in overall derivative volumes has seen an upsurge, which is leading to strong interest from global trading giants. Several global HFT firms are moving away from developed markets due to regulatory clampdowns, market-wide proliferation of near-
zero latency, and overcrowding of the HFT marketplace along with a decline in volumes, and are looking towards emerging markets to maintain their profitability. As these firms enter India and begin to deploy more sophisticated algorithms, market depth and liquidity will improve significantly. Currently, liquidity is challenge beyond the top 100 securities and the entry of more players will enhance liquidity across the market. From a technology perspective, the Indian market has adopted sophisticated technology quickly and the market is expected to evolve as vendors start bringing in improved systems. As sophisticated technology pervades the market, technology budgets will increase and latency is expected to come down further. Regulatory activity is also headed in the right direction. SEBI and the exchanges are beginning to understand the benefits and risks of complex systems better than before. A lot of activity regulating machine-to-machine trading will be seen and the recent consultative approach of SEBI is a positive for the industry.
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
As competition between exchanges heats up, the resultant technology up-gradation and further market making incentives will attract foreign players further.
Opportunities Putting all the pieces together, Indian’s market microstructure offers opportunities for global traders, market makers, and hedge funds to set-up shop. Some of the obvious opportunities are: F Latency arbitrage: This space is still evolving and nanosecond-level latency and optimization has not yet been achieved. This presents an opportunity to bring in developed market technology to exploit the inefficiencies in Indian markets and secure a first-mover advantage. F Cross-exchange arbitrage: There are significant volumes on multiple asset classes across NSE, BSE, USE, MCX, and MCX-SX and while cross-exchange arbitrage is taking place in this segment, there is room for new players to establish themselves. There are a number of Indian contracts that are traded on global exchanges (such as SGX, DGCX, etc.) which presents a global cross-exchange opportunity. F Statistical arbitrage: This is a white space and there are not a whole lot of players doing statistical arbitrage. F Quant-based long-short investing including shorting using single-stock futures: Long-short investing strategies are likely to succeed in less efficient markets like India due to less ‘crowding effect’.
34
WORD ON THE STREET
What is your
prediction for electronic trading in Asia for 2014? Yasuyuki Konuma, Executive Officer, Product & Market Development, Tokyo Stock Exchange, Inc.
2
013 has been a pivotal year for the Japanese financial markets, mainly due to the business aggregation of the two leading domestic securities exchanges TSE and OSE under the Japan Exchange Group umbrella. The upcoming year will see further consolidation, such as the phasing out of TSE’s old co-location facility and a complete migration into JPX Colo “All” (TSE) as well as JPX Colo “OPEN” (OSE) in March 2014. Also in March, JPX will migrate TSE’s current Tdex+ derivatives trading platform (based on LIFFE Connect® technology) into OSE’s J-Gate platform (based on Nasdaq OMX Click technology) and thus, we foresee elevated trading levels on the derivatives side due to all Japanese financial derivatives products being traded on a single platform.
Matthew Dalziel, Marex Spectron, Chief Operating Office – Asia
A
s the US and EU OTC reporting environment solidifies, Asian regulators and exchanges will respond and implement their rules through 2014. The impact of this will be a key focus of the year for Asian finance professionals. I feel there is an opportunity to use the increased transparency of OTC reporting to enhance trading models and re-shape strategies.
We also feel that there will be more macro volatility than most expect in 2014, largely due to the new Federal Reserve Chairman Janet Yellen’s on-going debate about unwinding QE in the US.
Hiroshi Matsubara, Marketing Director, Fidessa Japan
A
key 2014 milestone will be the merger of the TSE and OSE derivatives markets under JPX in March. As a result, major Japanese derivatives instruments (e.g. Nikkei 225 futures, JGB futures) will be traded on a single matching engine and operational efficiencies for market participants are expected to improve. This should encourage more liquidity from HFT on the Japanese derivatives market.
TK Yap, Executive Director and Head of Institutional Business, OCBC Securities Pte Ltd.
W
ith the proliferation of EMS choices in the Asean region, we are seeing the click trading proprietary traders expanding beyond isfutures to cash equities using the same ladder trading techniques. What is different is, as they move from trading macro (homogenous) contracts to trading micro (heterogenous) contracts where there is a great deal more alpha to contend with, their knowledge of the local market microstructure and sales trading information flow suddenly becomes important for a better trading success rate. The role the local broker plays in this can make a difference for a trader.
Edward Higase, KVH President, Chief Executive Officer and Representative Director
W
e believe that the upcoming regulatory requirements and the hyper-competitive US environment will further increase demand from overseas traders to seek opportunities in China, Taiwan, emerging markets and also re-emerging markets such as Japan. With Abenomics launched, record equity volumes, a strong retail-driven FX marketplace and the upcoming completion of the integration of the derivatives market in March 2014, we see Japan, along with other markets, as one of the drivers for Asia’s success in 2014.
Zennon Kapron, Founder, KapronAsia • Continuing reform, new incentive programs, and expanding asset class options will continue to open new opportunities for hedgefunds in China. • Algo trading will continue to grow, albeit slowly. Algo trading is still new in China and comments from traders who have been using algo trading indicate that the performance benefits may not outweigh the costs and ‘incomplete’ sets of asset classes and financial instruments will continue to be an impediment.
Ian Wright, Chief Business Officer, DGCX.
E
merging markets will see a new phase of electronic trading innovation in 2014, driven by customer demand, diversification needs and market reform. The relative lack of legacy systems in these markets will support the shift to new technology. The key to success will be implementing solutions that adapt state-of-the-art approaches to local needs.
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
Share Volume
www.asiaetrading.com z Jan-Feb 2014 z Asia Etrader
$1,035,111,768,743 1,149,960,870,555
$407,431,022,976
$144,259,428,401
$202,507,129
$11,261,408,703
$480,808,695,592
$55,971,490,769
$260,722,414,042
$3,797,674,180,275 2,589,286,859,541
$3,875,811,635,722 2,338,879,325,791
$629,892,443,255
$577,849,629,604
21,133,170,225,597 14,372,549,410,998 6,760,620,814,599 47.04% 16,019,203,115,942 11,283,831,747,634 4,735,371,368,308 41.97% 3,772,821,801 3,253,960,499 518,861,302 15.95%
KRX
KOSDAQ
BMB
MCX SX
NZX
NSE
PSE
SGX
SSE
SZSE
TWSE
SET
Total
4,569
529
1,166
ASX
BSE
13,243
3,135
HKEx
3,329
1,190
5,753
635
KRX
KOSDAQ
BMB
10,963
1,291
7,974
9,322
3,279
9,095
13,264
5,365
NZX
NSE
PSE
SGX
SSE
SHSE
TWSE
SET
MCX SX
16,704
JPX
IDX
3,026
HOSE
Hanoi SE
FY 2013 (USD)
Average Trade Size
NA
343,560,407,693 146.64%
-42,454,767,672 -6.31%
1,536,932,309,931 65.71%
1,208,387,320,734 46.67%
23,464,855,236 9.89%
14,863,856,361 36.16%
-42,836,429,663 -8.18%
3,685,923,860 48.66%
202,507,129
25,092,541,346 21.06%
-57,812,932,790 -12.43%
-114,849,101,812 -9.99%
3,655,612,569,162 99.53%
22,508,011,510 23.89%
5,284
15,613
7,112
2,844
10,839
7,201
1,326
9,815
NA
6,316
1,067
3,374
15,954
3,179
13,890
2,702
1,041
537
6,028
FY 2012 (USD)
436,738,126,009
1,009,562,568,757
171,250,609,503
3,359,170,752
0
244,890,373,600
146,073,570,393
130,591,126,667
494,331,274,984
525,355,133,300
% Change
Shares FY 2013
Average Trade Size
64
11.70% 4,640
NA
81 1.53% 28,834
-2,350 -15.05% 11,447
1,983 27.88% 5,756
435 15.29% 2,576
-1,517 -14.00% 28,427
772 10.73% 65,319
-36 -2.70% 427
1,148
NA
-563 -8.92% 11,722
123 11.52% 284
-45 -1.33% 304
750 4.70% 2,054
-43 -1.37% 27,610
-648 -4.66% 24,522
324 12.00% 4,313
125 11.98% 3,095
-8 -1.51% 295
438,725,496
230,210,724
208,514,772 90.58%
318,963 NA 255,400 33.09%
1,407,290,075 41.89% 1027263
5,708,398
1,311,210 22.97%
12,980
335
383
2,147
26,706
23,778
4,035
2,509
287
2,603
25,120
12,200
4,996
2,290
19,953
176,856
434
4,352
% Change
NA
3,714 14.78%
-753 -6.17%
760 15.22%
286 12.49%
8,474 42.47%
-111,536 -63.07%
-7 -1.58%
288 6.62%
NA
-1,258 -9.69%
-51 -15.21%
-79 -20.67%
-94 -4.37%
904 3.39%
744 3.13%
279 6.91%
586 23.37%
8 2.63%
-678 -26.07%
Change
1,991,791,096,670 178.84% 107704453 44,336,574
63,367,879 142.92%
18,249,412,200 3.47% 47489981 43,062,573 4,427,408 10.28%
810,124,611,382 49.31% 426170131 328,865,584 97,304,547 29.59%
898,923,911,635 43.11% 1158337033 910,487,161 247,849,872 27.22%
358,294,297,268 82.04% 27967518 21,888,611 6,078,907 27.77%
-551,046,663,200 -54.58% 7019608
-12,209,924,749 -7.13% 372516236 394,768,649 -22,252,413 -5.64%
771,863
20,548,974 NA 318963 0
49,040,188,393 20.03% 25074902 18,866,732 6,208,170 32.91%
-48,811,933,074 -33.42% 342347925 435,967,760 -93,619,835 -21.47%
-36,076,857,737 -27.63% 310957974 340,853,016 -29,895,042 -8.77%
406,597,582,603 82.25%
Shares FY 2012
NA
572,046 19.86%
-632,284 -31.09%
236,376,552,474 29.87% 37224981 29,634,478 7,590,503 25.61%
Average Trade Size
3,105,513,234,450 1,113,722,137,780
543,604,545,500
2,453,192,744,269 1,643,068,132,887
2,983,876,221,088 2,084,952,309,453
795,032,423,277
458,515,905,557
159,040,684,754
4,766,460,827
20,548,974
293,930,561,993
97,261,637,319
94,514,268,930
900,928,857,587
1,027,791,671,239 791,415,118,765
-1,459 -24.20% 1,924
Change
Average Trade Size
234,289,221,911
672,347,210,927
237,257,558,806
41,107,634,408
523,645,125,255
7,575,484,843
0
119,166,887,055
465,243,955,766
94,196,155,380
Exchange
$7,328,456,969,870 3,672,844,400,708
$116,704,166,890
2,879,825
3,269,992,130 28.14% 3451871
655,764,211,302 32.62% 108726353 84,549,419 24,176,934 28.60%
2,033,499
-764,746,600 -14.99% 1401215
-9,876,673,950 -16.81% 165644985 204,358,602 -38,713,617 -18.94%
-35,701,527,488 -8.87% 190714913 154,717,031 35,997,882 23.27%
JPX
11,619,361,520
5,101,693,000
58,749,535,641
402,670,190,456
2,666,145,525,469 2,010,381,314,167
14,889,353,650
4,336,946,400
48,872,861,691
366,968,662,968
IDX
265,417,407,999 22.60%
2,664,968,863 34.25%
-483,489,529 -22.84%
-22,143,620,597 -20.17%
-61,191,523,162 -6.56%
$1,439,832,344,969 1,174,414,936,970
7,782,058,755
2,116,801,669
109,793,858,161
932,641,064,497
HKEx
% Change
$10,447,027,618
Net
HOSE
FY 2012
Number Trades
$1,633,312,140
FY 2013
Number Trades
Hanoi SE
% Change
$87,650,237,564
Net
$871,449,541,335
FY 2012
Share Volume
BSE
% Change FY 2013
ASX
Net
FY 2013 (USD)
FY 2012 (USD)
Value Share Trading Value Share Trading
Exchange
EQUITIES
35
Equity Trading Recap FY 2013 Source: Thomson Reuters Equity Market Share Reporter
36
EQUITIES
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EQUITIES
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38
EQUITIES
Japan’s alternative markets see hope in uptick reform Revision of short-selling rules shows ongoing support for a fair market By Dan Barnes
J
apan has moved a step closer to levelling the playing field between trading venues, and consequently providing best execution to investors. On 5 November 2013 a revision of short sale regulations came into effect in Japan. Previously short-sellers could not sell a stock under the lowest sale price that traders with long-positions were making in the market. That outright ban has been replaced with a ‘circuit breaker’; the uptick rule now only applies to cash products which have declined in price by 10% or more from the previous day limiting it to prevention of stocks going into freefall. Bank of America Merrill Lynch reported an improved fill ratio and decreased arrival cost after the change, noting, “We have adjusted algos according to the new rules, and execution qualities improved as we had predicted.” “[Changing] the uptick rule application [to only follow] a 10% move is a nod to compliance with other markets and exchanges; the implementation of this rule is a simple job for the algo developer” says Jon Evans, CEO of Abiding Capital, a buy-side firm whose Global Discretionary fund trading in Japan. “It’s also significant that [the FSA] are acknowledging proprietary trading systems (PTSs) as a legitimate and relevant part of the landscape.” The rule, which covers PTSs and secondary exchanges, is part of a series of reforms that the country’s regulator, the Financial Services Agency, has introduced in recent years which give these markets a fighting chance against the incumbent Japan Exchange. A ban on short
“It’s also significant that [the FSA] are acknowledging proprietary trading systems (PTSs) as a legitimate and relevant part of the landscape.” Jon Evans, CEO, Abiding Capital
selling by proprietary trading systems (PTSs), the country’s alternative trading venues was lifted in 2010. In 2012 the Takeover Bid (TOB) rule was rescinded; it had required any buy-side firm that bought 5% of a stock over-the-counter, including via a PTS, to launch a takeover bid, making PTS use a concern for some traders. “The regulatory changes have made it easier for international and retail investors to trade in Japan,” Beth Haines, head of global Marketing at Chi-X Global, parent company of Chi-X Japan, a major PTS.
Need for change Not one to rush into things, the FSA has been looking into this revision for some time, with considerable work by investors and brokers alike to deliver evidence to support a change. “One of the main purposes of the short sell uptick rule was to prevent short sellers from
improperly pushing down stock prices,” says Christina Makiguchi, director for equities at Goldman Sachs Electronic Trading, Japan. “A lot industry studies have shown that short-selling is a function of the market. People short sell when the price goes too high and the speculating cost is the risk taken by the traders, after someone shorts they have to buy back which is a way to support the market.” According to figures from the Tokyo Stock Exchange (TSE), the larger equity market within the incumbent market operator Japan Exchange Group (JPX), domestic investors have been net sellers since the start of 2013, while overseas investors have been net long. Comparing the pre- and post-rule change figures, one can see that the proportion of overall selling that was short-selling on the TSE increased overnight from an average of 23.53% to making up 30.19% of all selling activity. On PTS’s this
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number was even higher. Some orders are exempt from the price restrictions, for example traders using index arbitrage, exchange-traded fund arbitrage and merger arbitrage would send orders in short-sale exempt format which required them to declare the purpose of the trade. The growth following the rule change was primarily in those trades that were subject to price restriction e.g. not exempt. “There has been an increase in short sell ratio as a proportion of sales, with a decrease of shortsale-exempt trades,” Makiguchi explains. “So we will see a decrease of short-sale exempt and in increase in the short-sale ratio. At this point we are only a month into the rule and we have not seen a major volume impact; clients are not trading more shorts because it is now easier to do so. And we haven’t seen clients put in more into longs because they could cover their shorts easier.” Christopher Orr, head of Sales and Marketing at SBI Japannext, a PTS, says, “What can be seen by looking at the number of short sale executions, as a percentage of all executions, is that prior to the revision, the five-day average of short sales as a % of executions rose from around 11% (lower % than the TSE 21%) to around 40%. Post-revision levels of short sales were slightly higher than that of the TSE, though this perhaps is just a simple reflection of traders’ preference in the new more flexible marketplace. Perhaps the
complication of calculating whether an order was uptick-rule compliant on each venue meant that it was easier before for the traders to send the orders to one venue.” A spokesman for the TSE’s equity department acknowledged the change, but said determining a cause would be difficult. “If you consider that this change [in the uptick rule] would result in a change in investment strategies, then we would expect to see a higher level of trading/selling than before the change,” he said. “However, since trading is also affected by other changes in the market environment, we would also need to monitor developments in other aspects of the market.”
Good move The revision has been widely welcomed by market participants, who concur that the practical challenges of applying the original rule were an impediment to doing business. “I believe the intent of the uptick rule was to make it difficult to make short-term profits by manipulating stock prices to the downside and to safeguard retail margin buyers from excessive margin calls,” says David DeGraw, head of electronic trading at broker Daiwa. “The side effect of the rule was to increase transaction costs for any institutional investor or broker trading strategy that requires simultaneous buying and short-selling of securities
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such as statistical arbitrage, market-making, index arbitrage or fundamental long-short.” The consequences of the revision will be to make the market more attractive to overseas investors, says Orr. He believes that it balances the need to guard against potential causes of market instability, while at the same time removing obstacles to market. “[It will] ease liquidity and increase trading volume in the face of increased competition from other international equity markets,” he says. “This rule change applies to all venues equally, and though not a significant market share driver in itself, it is part of an important trend in Japanese equity market towards equal treatment of PTS venues. The next important step is the relaxation of restriction of margin trading on PTS venues. If the goal is increased liquidity in the Japanese equity market, allowing the PTS venues and the TSE to compete on equal footing and give investors a choice is the best way to achieve this.” DeGraw agrees that trading conditions will be improved but is equally unconvinced about any effect on PTSs. “This will definitely have a positive impact on liquidity as price formation is much more efficient under the new regime and should further serve to lower overall risk,” he says. “I do not think this would have any material bearing on the market dynamics for the PTS in relation to the JPX.”
40
FRAGMENTATION
Fragmentation Footprint Q4 2013 Over the past year fragmentation increased in Asia, as alternative trading venues gained wider acceptance within Japan and Australia, delivering price improvement and choice. Chi-X Australia (CHIA) shined while proprietary trading systems (PTSs) Chi-X Japan (CHIJ) and SBI Japannext (SBIJ) struggled to gain market share in their respective markets. Broker dark pools, however, either remained unchanged in terms of market share or contracted as we saw in Australia. Overall, 2013 saw trading volumes rise, much to the relief of the sell-side. Competition delivered lower costs and a dynamic trading landscape at least in Japan and Australia.
Japan Consolidation continued in Japan with the merger of the OSE and TSE completed in 2013. With three venues now serving institutional and retail flow the combined entity is poised to lower market impact costs and increase overall liquidity. Market share of equity trading by value traded across the PTSs peaked at just over 6.5% in October on close to US$40 billion. Comparisons do not include the JPX auction but do include ChiJ’s hidden order volume. This past quarter saw ChiJ connect to retail broker Rakuten Securities. Both PTS are now seeing flow from this segment of trader. The average trade size in terms of value has been steadily increasing on the PTSs (approx. US$6,000) through the year. The post-Abenomics bulge saw average order sizes on the primary decrease to nearly US$14,000 per trade but returned to the pre-Abenomics levels ending the year at US$16,600. Average order sizes in terms of shares is largely unchanged for the PTSs at 700 shares but drifted lower on the primary starting the year at 2,600 shares to end the year at 1,900 shares. Customers are trading the same amount but at a higher price. This is good for the industry as a whole as commissions are generated on the notional traded rather than the number of shares as found in the US. ChiJ’s November report says that market share for N225 index names, generally the largest and most liquid, was 3.3% although trades in over 1,000 names did occur. Our data from Thomson Reuters shows ChiJ with just 1.98% of Japan market share at the end of 2013. Price improvement seems to have bottomed out at around six basis points since May 2013. SBIJs November report claimed price improvement of 7bps overall and 5.5% market share of N225 names. Thomson Reuters had SBIJs share of the market in November at 3.76% and 3.72% at the end of the year but this was across all names. SBIJ had trades in 1,296 names to ChiJs 1,045. We expect ChiJs name count to increase given its recent connection to Rakuten. Just to note that within the top five securities each report by market share, ANA stands out as being listed on both. PTS trading for this name is 21.68% of total trading with a weighted average price improvement of 19.52bps. Further study of this security’s velocity of trading and average trade sizes might reveal algo driven trading, in particular, arbitrage and possibly demonstrating that competition does increase the trading pie. Otherwise, liquidity is being sapped from the JPX, increasing spreads and trading costs to the industry SBIJ fared better in 2013 than its cross-town rival CHIJ according to Thomson Reuters’ data. Its market share increased slightly by around 0.4% while CHIJ’s contracted by around 0.3% over the past 12 months. Market share on JPX remained just about flat, oscillating between 95.5% during the Abenomics bubble and 93.45% in October. Keep in mind that market share numbers do include the consolidated TSE and OSE turnover.
Another development to market structure this quarter occurred in November regarding short selling regulations (see page 38). PTSs were previously not able to offer short selling but they now can, which is expected to enhance liquidity and tighten spreads. Margin trading should be in the works soon, which is currently not allowed on the PTSs. The trading landscape will continue to evolve with the next change being the tick step found on the primary becoming aligned to that of the PTSs. As it stands now, the PTSs are offering price step of ¥0.1 and the primary offers ¥1. The change is expected this year to cover 100 names then expand to all cash products by 2015. It remains to be seen how much of an impact this will have on the PTSs as this will eliminate one of their key competitive advantages. The downstream affect to the industry however, is that brokers will have to upgrade their technology to facilitate the change in the tick size. This will also fuel the technology arms race for those arbitraging between venues. National best bid offer rules cannot be far off either.
Australia Australia, though a small market, was probably the most interesting country for competition as we saw Chi-X Australia capture a significant market share over the past year while the incumbent exchange, ASX, delivered improved execution at its Center Point (CP) venue. Chi-X issued a release that on 4 November that it had reached 24.67% of market share, a company record coinciding with its second anniversary and achieving 18.39% for that week. The boost came from its non-display trading. A report issued by the ASX claimed Chi-X had achieved 17.6% of the market during that week. We do not have access to weekly data, but our monthly data provided by Thomson Reuters shows that in November Chi-X had a record month with 12.48% of Australia cash trading. Impressive results indeed from a two year old company. Chi-X is not only seeing growth in its central limit order book (CLOB) but also from its non-display Mid-Point order type, almost doubling trading value since the start of the year growing from approximately 6% of total trading to 14% as of December. It is worthwhile noting that the primary’s market value has been declining overall peaking at US$78.8 billion last May where Chi-X claimed 8.5% of the market to its December 2013 low of US$45.7 billion where Chi-X held 11.9 %. Chi-X has been capturing market share in a contracting market. Turning to average trade sizes Chi-X began the year where it started just above US$2,500 per trade but the ASX has been decreasing from just over US$4,500 at the start of the year to less than US$3,330 per trade. Average orders by quantity of shares has risen dramatically to just over 500 shares per trade to end the year just shy of 1,500 shares per trade. It appears that Chi-X is Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
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FRAGMENTATION
seeing more trading in smaller names and that could explain where the additional market share is coming from. ASX has seen the number of shares per trade gyrate between 2,200 and 1,500 shares. Its weekending 20 December report saw them finish the year 11.8% of total market trading with 26.84bps of price improvement. The most recent Centre Point (CP) report at the time of writing was the November report. In it we see that this venue continues to prove a viable service for execution as A$4.9 Billion was traded that month capturing a record 6.7% of on market trading or 20% of nondisplay flow. Both this venue and Chi-X have not seen the declines in volume of the ASX’s main lit market and so it would appear that liquidity is moving away from the primary’s CLOB to find better prices and matching. This would make sense as different clients have different trading needs. We expect that at some point liquidity will reach an optimal market share based on efficient execution on each venue.
Three of the top five securities by value are traded on both ChiA and CP with more than 40% of Telstra Corporation trading away from the primary. Chi-X reports a slightly better price improvement on these names than CP. One can’t help but wonder if inter-venue arbitrage is happening and would be clearer if we could see net positions in these securities. Merrill Lynch took the top spot for the first time on Centre Point eking out long time leader UBS Securities each executing more than A$1.2 billion Broker dark pools continue to hover around 3-4.5% since a price improvement rule was enforced by market regulator ASIC late in May 2013. Note: 1) Thomson Reuters data comparisons does not include the opening auction which the ASX typical executes 20-25% ADV. 2) Thomson Reuters reports in USD and Chi-X reports in A$
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POST-TRADE
CITIC & CLSA: Milestone for the market and cornerstone for China Post-merger plans are looking fruitful, writes Lynn Strongin Dodds
T
Wang Dongming CITIC Securities chairman
he long awaited acquisition of CLSA Asia Pacific by CITIC Securities grabbed the headlines when three years of discussion finally paid off; now the market is watching to see if the China-based firm can forge a path in the intensely competitive world of global finance. “The deal has garnered so much attention because it is the first instance of a Chinese institution acquiring an international organisation,” according to Thomas Treadwell, Asia Pacific head of OTC Clearing at BNP Paribas. “I do not see it though as a turning point but rather a milestone. The move was partly driven by the renminbi becoming a more international reserve and the gradual opening of domestic markets going offshore.” George Molina, senior vice president, director of Asian Trading at Franklin Templeton Investments, says “The acquisition is [not a] catalyst but it is definitely an example of the direction that China is clearly heading in. It is no secret that other banks and brokerages are keen to mirror a similar deal, although onshore regulatory bodies are adopting a wait and see attitude as to the success of the deal before potentially allowing more.” CITIC Securities is China’s largest broker by market value and is controlled by government-owned CITIC Group, which holds a 23% stake. It initiated discussions in 2010 with CLSA’s parent, French bank Credit Agricole, about a 50-50 joint venture but ended up taking a 19.9% slice. In 2012, talks turned to a full-blown acquisition which led to the $841.7 m purchase of the remaining chunk this summer. Concerns were raised over the cultural fit and the fate of the research department which had won plaudits for its objectivity. The time spent hammering out the deal allowed both parties to smooth over any cultural differences. As Raymond Lee, head of strategy and business development at CITIC Securities International, notes, “We spent almost four years negotiating with Paris mainly due to management changes and external business conditions. This allowed both teams to leave no stone unturned. We spent a lot of time talking through what made people tick in each organisation.” Andy Maynard, CLSA global head of trading & execution agrees that the cultural differences were negligible. “We have always looked at ourselves as an international financial services company that was part of a French bank. Our global network is one of the major drivers of the deal as we can provide a conduit for international business flowing in and out of China. This cannot be done organically.” Barnaby Nelson, head of client development at BNP Paribas, agrees, adding, “Organic growth is just not fast enough. CITIC wants to increase its client base and also Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
POST-TRADE
George Molina Senior Vice President
Franklin Templeton Investments
“It is no secret that other banks and brokerages are keen to mirror a similar deal”
to have greater expertise. The merger with CLSA will pay great dividends as the capital account opens. I also do not see many difficulties with CLSA because it is more culturally savvy than most. It is a unique animal in that it is the only research-driven firm outside of the global bulge brackets, plus it understands both the mainland China and western ways of doing business which should help mitigate any differences.” According to Lee, the acquisition of CLSA allows CITIC to further differentiate its services and products from its Chinese and other international competitors. “We are now uniquely positioned to provide value-added services to our clients through the international platform of CLSA. Its network, which includes the US, enables us to act as a bridge for our customers who want to invest outside of China and Hong Kong as well as for overseas investors who want to invest in China. We can provide an end-toend service whereas before we had to use other execution brokers for trading.” At the third plenum of the current Chinese Communist Party’s central committee held in November it was suggested that China’s markets may open further. Central bank chief Zhou Xiaochuan said that the country will
expand quotas further for the Qualified Foreign Institutional Investor (QFII) programme and the Qualified Domestic Institutional Investor (QDII) programme, and “may scrap quotas altogether when conditions are ripe.” The QFII and the renminbi qualified foreign institutional investor (RQFII) programmes give quotas for foreign institutions to invest in China’s markets, while the qualified domestic QDII scheme provides quotas for firms to invest their own funds or those of their clients in certain overseas financial markets, including Hong Kong, which is the largest destination for these schemes. This past year has already seen a dramatic shift with China expanding the quotas available to foreign investors to bring money into the country under QFII and RQFII. The overall QFII quota, which is the largest, shot to $150bn in the summer, nearly double the previous $80bn. The QDII has not been as successful as Chinese investors prefer their home markets and when they do venture outside it is mainly to the US and large-cap stocks. However, this is expected to change over time. “QDII unfortunately was launched at a very challenging time in the global equity markets evolution and was further hit by the global financial crisis,” says Molina. “I think that was a one-off event, with short term implications as clearly QDII will grow in the longer term. There is talk of a QDII2 program about to be released which would seem to allow Chinese retail investors directly trade equities internationally.” Aside from catering to investors, CITIC is also hoping to leverage CLSA’s global client list of 1,700 large institutions to strengthen its ability to raise capital for Chinese companies. In the past, Chinese financial service companies have lost out on fees due to their relative inexperience in helping their growing ranks of clients, ranging from oil majors to retailers, to expand abroad. Moreover, the newly enlarged group sees opportunities from the end of the year-long moratorium on initial public offerings and the relaxation by the China Securities Regulatory Commission of the rules governing the way companies are approved for public trading on stock exchanges. There are currently almost 800 companies waiting in the queue for an IPO – a list that has grown over the past year as Chinese regulators tried to support floundering equities markets by suspending new offerings. CITIC has already won a seat at the top table as one of the six global sponsors along with BOC International, JPMorgan, Morgan Stanley and UBS behind Huishang Bank’s recent US$1.2 bn IPO on the Hong Kong market, the biggest Chinese bank offering in the past three years. In addition, CLSA originated a HK$1.2bn share placement for Xinyi Glass in September
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Raymond Lee Head of Strategy
CITIC Securities International
“We are now uniquely positioned to provide valueadded services to our clients through the international platform of CLSA.”
and CITICSec joined as a joint bookrunner. “The early signs are encouraging,” says Lee. “For example, look at the Asian equity league tables (Dealogic and Bloomberg), we are now among the top five. We have also done a number of debt deals due to the combination of CLSA’s relationships and distribution and our underwriting capabilities. These include the Philippines based Vista Land & Lifescapes $100m bond offering. Historically, companies would have only looked at the global players.” Looking ahead, Maynard believes opportunities can be further mined in fixed income, FX as well as equities. “CITIC is leveraging CLSA’s global distribution power and there will be a move into other asset classes over time,” he says. “We are also laying down a foundation for the growth in China’s capital markets over the next 30 to 40 years. At some point the walls will be lowered and there will be easier access to the markets. Once that happens we will be at the cornerstone of money flowing back to China.”
46
TECHNOLOGY
BSE pushing the technology arms race Bombay Stock Exchange (BSE) is rolling out a trading platform from German market and infrastructure operator Deutsche Börse in an effort to better appeal to international traders. The new system will allow trades to conclude in milliseconds and matches its main rival, India’s dominant market the National Stock Exchange (NSE). By Gurdip Singh
U
nder pressure from new exchange MCX-SX and the NSE, the BSE has to fight for its ground. Although it has gained currency and interest rate derivatives trading capabilities with the new platform, three other exchanges in India already offer these services. The exchange will need to develop liquidity if it is to attract offshore investors; its ability to compete will require strategy as well as technology. The new trading system, BOLT Plus, was rolled out over a six month period. BSE began with its currency derivatives segment on 28 November and is transferring equity futures and equity options, index futures and index options to its new trading system over January 2014. The BOLT trading platform is based on Deutsche Börse’s T-7 technology. It will provide the fastest speed available across Indian exchanges, claimed the BSE. T-7 is a tried and tested global trading architecture, first introduced in 2011. Deutsche Börse and Eurex use T-7 at subsidiaries in New York, the National Security Exchange and the US Options Exchange. The Germans hold a five per cent stake in BSE and have committed
to help the Indian exchange operate on international standards. The technology will assist with order-handling capacity, speed as well as throughput. The new system is tightly integrated with the other important systems such as RTRMS, the surveillance platform eBOSS, real-time collateral management and the clearing & settlement system, CLASS. The revamp is supported by BSE clients. “Technology is the need of the day,” said Prashanth Tapse, assistant vice president for research at Mumbai-based Mehta Equities. “BSE being the oldest bourse in Asia has taken the right steps in the time when global businesses are growing on microsecond platforms. With the new trading technology ‘BOLT Plus’ BSE will be the fastest trading platform in the country today.” “This new platform will definitely be a boon to many sub brokers and traders. By upgrading to the new platform, BSE will be able to improve order handling capacity and will also allow the exchange to scale it up to 500,000 order messages per second,” Tapse said.
Electronic trading growth Algo trading is a relatively small percentage of
overall trading in India, and typically where it exists, plain vanilla algorithms are used such as VWAP, TWAP and smart order routing. Due to the smaller number of stocks traded on Bombay there is a limited value to smart order routing between the exchanges. Nevertheless there is a growing community of high-frequency trading (HFT) firms, typically home-grown proprietary trading houses, for whom high-speed trading is a necessity and that requires high speed matching engines at the exchanges. “HFT is about 20% of the market,” said the head of execution at a local broker in Mumbai. “We do around 5% of most of the asset classes. Primarily we do a lot of arbitrage and market making and process around 10-20 million orders every day. There are a lot of HFT players but I think of them as an independent market as opposed to algos for execution.” He notes that most HFT players do not target foreign investors or long-only trading on a fixed stock, and as a consequence any boost in HFT volumes may not reflect increased liquidity for overseas players. “I think most FIIs prefer to trade DMA when they send their order in,” he says. “The advantage that algo trading has is if you are
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trying to buy a significant share in an illiquid stock. As FIIs don’t trade in that market very much, there is not a significant demand for algo execution from foreign firms. Domestic players mostly trade midcap and small caps through block deals outside of market. However we have clients who trade small and midcaps through VWAP and so on, and they get a 20% advantage over the regular dealers.”
Ancient legacy Explaining the upgrade, BSE pointed out that the people “don’t want to work with older systems”. The maintenance of the older system was costly. There was no graphical user interface for development and therefore it was not easy to modify. Nor was the older system flexible; it would have cost more money and time in development costs to implement any change, due to its use of proprietary hardware, operating system, database etc. The hardware was also slow as the fault tolerance was in built. Comparatively, the new hardware comes equally rugged and achieves fault tolerance using parallel processing and other methods, a BSE spokesperson said. In terms of scale, the implementation of new technology will help BSE increase order handling capacity to 100,000 orders a second from around 20,000 orders a second. Its roundtrip latency will fall to 25 microseconds over the next three years, said the BSE. The system was installed on the non proprietary hardware, allowing it to scale more effectively.
“Technology is a pre-requisite and necessary condition for operator and market place...” Uwe Schweickert Director and Head of Section in Executive Office
Eurex Frankfurt AG
“We can add more boxes and processes to add more products as well increase the order handling capacity while maintain the response times,” said a spokesperson for the exchange. In case the new system has a failure in any module, the system automatically switches over to the backup hardware and software, each process in the system has its individual failover backup.
More than technology Deutsche Börse has been paying a lot of attention to the mega Indian market over the past several years, with an expectation to
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expand its business in Asia. During a speech at the firm’s annual reception in January 2013, chief executive Reto Francioni said, “Consolidation is proceeding in Asia, and we would be well advised to keep a close eye on this development and further consolidation of stock exchanges.” Uwe Schweickert, director and head of section in Executive Office at Eurex Frankfurt AG, said “Our end objective is to help and support the BSE to grow its derivatives market and that is basically one of the elements in this strategic partnership.” He also underlined the importance of the Indian market and BSE partnership in many ways. He said, “We are not only 5% share holders in the BSE but we consider this shareholding as a strategic partnership. We want to cooperate to build up the BSE as a market place for India. We want BSE to function not only as a business but also as a regulated exchange that provides high quality services.” He applauded BSE’s ability to implement this high-end trading architecture/platform with a good commitment and efforts. “It took BSE five months from ‘I want to have it and to implement the project’ when comparatively such IT projects usually takes years and consume millions of dollars and man-hours,” he noted. “Technology is a prerequisite and necessary condition for operator and market place as it operates more efficiently and effectively. It is a question of reliability of the technology but building up volume comes with products.”
48
BACK PAGES
Events Date
Event
Where
Type
22-23 January
iFX EXPO Asia 2014
Macua
Conference
19 February
Asia Etrading Forum
Tokyo
Forum
25-27 February
Clearing Settlement & Custody
Singapore
Conference
6 March
FISD Singapore
Singapore
Forum
11 March
39th Annual International Futures Industry Conference
Boca Raton
Conference
Dates Date Country Holiday
Date Country Holiday
13-Jan
Japan
Coming of Age Day
01-Feb
South Korea
Seollal Holiday Day 3
14-Jan
Indonesia
The Prophet Muhammad’s Birthday
01-Feb
Malaysia
Second day of Chinese Lunar New Year
14-Jan
Malaysia
The Prophet Muhammad’s Birthday
01-Feb
Malaysia
Federal Territory Day
14-Jan
Pakistan
Eid Milad un-Nabi
01-Feb
Singapore
Second day of Chinese Lunar New Year
26-Jan
Australia
Australia Day
01-Feb
Taiwan
Chinese New Year Holiday 1
27-Jan
Australia
Australia Day observed
01-Feb
Vietnam
Tet holiday
30-Jan
China
Spring Festival Golden Week holiday
02-Feb
Taiwan
Chinese New Year Holiday 2
30-Jan
South Korea
Seollal Holiday Day 1
02-Feb
Vietnam
Tet holiday
30-Jan
Taiwan
Chinese New Year’s Eve
03-Feb
Hong Kong
Third day of Chinese Lunar New Year
30-Jan
Vietnam
Vietnamese New Year’s Eve
03-Feb
Taiwan
Chinese New Year Holiday 3
31-Jan
China
Chinese New Year
03-Feb
Vietnam
Tet holiday
31-Jan
Hong Kong
Chinese Lunar New Year’s Day
04-Feb
Vietnam
Tet holiday
31-Jan
Indonesia
Chinese Lunar New Year’s Day
05-Feb
Pakistan
Kashmir Day
31-Jan
South Korea
Seollal Holiday Day 2
05-Feb
Vietnam
Tet holiday
31-Jan
Malaysia
Chinese Lunar New Year’s Day
06-Feb
New Zealand
Waitangi Day
31-Jan
Philippines
Chinese Lunar New Year’s Day
11-Feb
Japan
National Foundation Day
31-Jan
Singapore
Chinese Lunar New Year’s Day
15-Feb Malaysia
Thaipusam
31-Jan
Taiwan
Chinese New Year’s Day
28-Feb
Taiwan
228 Memorial Day
31-Jan
Vietnam
Vietnamese New Year
01-Mar
South Korea
Independence Movement Day
01-Feb
China
Spring Festival Golden Week holiday
21-Mar
Japan
Spring Equinox
01-Feb
Hong Kong
Second day of Chinese Lunar New Year
23-Mar
Pakistan
Pakistan Day
Asia Etrader z Jan-Feb 2014 z www.asiaetrading.com
DIRECTORY Founded in 1996, FlexTrade Systems Inc. is the industry pioneer in broker-neutral, execution and order management trading systems for equities, foreign exchange and listed derivatives. With offices in Asia, Europe and North America, FlexTrade has a worldwide client base spanning more than 175 buyand sell-side firms, including many of the largest investment banks, hedge funds, asset managers, commodity trading advisors and institutional brokers.
BofA Merrill Lynch, recently voted Asia’s Best Brokerage and Asia’s Best Sales in the 2012 Institutional Investor AllAsia surveys, offers a full suite of premier multi-asset execution services globally backed by the bank’s 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 BofAML’s institutional clients.
For more information, visit FlexTrade Systems at: www.flextrade.com or follow news of the company on Twitter at www.twitter.com/flextrade or LinkedIn at: www.linkedin.com/company/flextrade?trk=top_nav_home. Call: +65 6829 2569; e-mail: sales_asia@flextrade.com.
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
BNP Paribas Securities Services, a wholly-owned subsidiary of the BNP Paribas Group, is a leading global custodian and securities provider backed by a strong universal bank (rated AA- by Standard and Poor’s). It provides integrated solutions to all participants in the investment cycle including the- buy-side, sell-side, corporates and issuers.
Barnaby Nelson Head of Client Development, Asia – Banks, Broker Dealers and Corporate Issuers BNP Paribas Securities Services PCCW Tower, Taikoo Place, 979 King’s Road, Hong Kong Tel : +(852) 3197 3318
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
Marex Spectron is the world’s leading independent commodities brokerage. We have significant market shares in all major commodity markets with particular strengths in Base Metals, Gas, Oil, Power, Freight, Cocoa, Coffee, Sugar and Grains. Our expert teams can also guide clients to the best opportunities in energy futures, precious metals, renewable energy, cotton and many more products. MS offers a number of vendor and in-house trading platforms to meet customer’s needs. Based in London but with offices across Asia and North America, we are members of the London Metal Exchange (where we are a Ring Dealer), the CME Group exchanges, ICE US, NYSE Liffe, ICE Futures and Eurex. Contact Matthew Dalziel Tel: +852 3909 8383 Mob: +852 9869 8879 Fax: +852 3909 8301 Marex Hong Kong Limited CE:AWH257 1106-7, 11/f, ICBC Tower, 3 Garden Road, Hong Kong http://www.marexspectron.com
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 Email: cm.asia@sungard.com Web: www.sungard.com/capitalmarkets Twitter ID: @SunGardCM
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