LEADER /// Editor-in-Chief /// Stephen Edge /// steve@asiaetrading.com /// Managing Editor /// Dan Barnes /// dan@icorp.co.uk /// Contributing Writers /// Stephen Price /// steveprice@ymail.com /// Lynn Strongindodds /// strongindodds@aol.com /// Rupert Walker /// rupertagwalker@gmail.com /// Ohchi Yasuo /// ohchi.commodity@gmail.com /// Roger Aitken /// roleoa@aol.com /// Cover Design /// Nadia P. /// nad3e9@gmail.com
PUTTING THE GENIE BACK IN THE BOTTLE
Asia’s market structure has come a long way at least some markets have. Of course, there have been growing pains in the midst of change and challenge; some good and some bad. But now that the genie is out of the bottle there is no turning back and Asia will continue its odyssey to devlop its capital markets by managing risk, trading more efficiently, settling faster and bringing news products to its consumers.
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Japan’s genie continues its assent through standard tick sizes though the PTSs would like to see that put back in the bottle. Taiwan, with China carries on with its integration. Granular assessment of latency is on the rise as the industry seeks a better tourbillon to measure trading. Indonesia is found reforming its SBL apparatus to offer more choice to its participants. It continues and nothing can stop it. This is our 10th issue and it has been a learning experience and not without growing pains of our own either. However, with this milestone behind us, there is no turning back as our genie is out of the bottle too.
Stephen J. Edge Editor Wild Wild Web Ltd. Suite 811 8/F New Trade Plaza No. 6 On Ping Street Shatin, NT Hong Kong
WWW.ASIAETRADING.COM
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CONTENTS
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PAGE 10
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MARCH 2014 VOLUME 2 ISSUE 1
04 06 10 14
IN THE ZONE
COVER STORY
COVER STORY
DERIVATIVES
Our round-up of industry news and developments across Asia last quarter.
Automation and Disorder - Asian exchanges must catch up to the standard of safety seen in other markets, without rushing so fast they put flawed practices in place.
TSE ticks box to pummel Proprietary Trading Systems The incumbent exchange has stood on its rivals’ toes; there are doubts as to whether they will dance again.
Hong Kong warrants surge - Hong Kong’s derivative warrant and CBBC market preserves its dominance and prepares for further growth.
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PAGE 24
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CONTENTS
18 20 22 24
ASIA FUTURES BUY SIDE VOLUME Access China - Buy-side traders are welcoming the RECAP emergence of algorithmic See the latest derivatives rankings at Asia’s exchanges.
trading suites for trading in China, but look forward to better transparency and execution tools.
REGULATION
No quick fix - Despite a slew of new regulatory measures, volume remains subdued in Taiwan.
WHO’S WHO
PAGE 44
PAGE 46
Asia Etrader spoke with Indriani Darmawati, Director PT Kliring Penjaminan Efek Indonesia (KPEI).
28 34 44
OPINION & ANALYSIS
Tick Size Reform: The Silent Revolution
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EQUITIES
POST TRADE
Could the JPX-Nikkei 400 become the benchmark of Japan’s economy? - GPIF’s decision to use the new index, listing of futures and the calculation model are all key.
Clearing becomes the derivatives battleground - Market operators are consolidating in order to expand post-trade operations
17 -VOLATILITY
A look at volatility around Asia.
30 - OPINION POLL Do you think Japan’s PTSs will be affected by the JPX tick size change?
31 - WORD ON THE STREET
“What do you think about SGX moving to T+2 settlement?”- Hear from some of your industry peers.
32 - O & A
Squeezing the Spreads
36 - FRAGMENTATION
Asia’s Fragmentation Footprint – Read the latest on alternative venue competition in Asia.
41 - ASIA EQUITY VOLUME RECAP
The latest rankings of turnover, average trade sizes, spread and market impact costs on Asia’s exchanges.
46 - TECHNOLOGY
BSE pushes India to microseconds – Matching engine upgrade drives the arms race on the subcontinent.
48 - BACK PAGES
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
regulation of alternative liquidity pools (ALPs). In other news, the Hong Kong SAR Government proposed waiving the stamp duty on the trading of all ETFs in its budget for April 2014 to March 2015. HKEx and LME announced the formation of the Board of LME Clear, the LME’s self-clearing platform currently in development. LME Clear is on track to launch on 22 September, 2014.
India
On 20 January, MCX-SX began live trading of cash-settled Interest
Australia
At the end of February, ASX announced it is engaged in a consultation process with a view to shortening settlements for cash market trades from T+3 to T+2. In other exchange news, ASX received regulatory clearance to launch its new managed funds settlement solution, mFund Settlement Service, which will be launched in the first half of 2014 and replaces traditional paper-based processes and uses the same electronic system (CHESS) familiar to investors and brokers for settling ASX share transactions. The exchange also received regulatory approval to allow its derivatives clearing house – ASX Clear (Futures) – to clear Australian and New Zealand dollar-denominated interest rate swaps for US bank branches in Australia. ASX and the Bank of China agreed to deliver Renminbi (RMB) settlement services to the Australian and Chinese financial markets by the middle of the year. Meanwhile, eight Australian domestic and international banks successfully joined the ASX OTC Interest Rate Derivatives Clearing Service as clearing participants and have started clearing trades on the platform. Back in January, the Australian Securities and Investments Commission announced that Citigroup Global Markets Australia had paid a penalty of A$40,000 for failing to demonstrate prudent risk management procedures.
China
The Dalian Commodity Exchange (DCE) and Dubai Gold and Commodities Exchange (DGCX) simultaneously launched polypropylene futures contracts on 28 February. In early February, the London Stock Exchange welcomed GF Financial Markets as its newest member, the first Chinese member firm focusing on equity and derivatives trading.
Hong Kong
SFC welcomed the re-appointment of Mrs Alexa Lam for a one-year term as its Deputy Chief Executive Officer and Executive Director of Investment Products. In late February, the regulator began a two-month consultation on the future
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Rate Futures (IRF) in its Currency Derivatives Segment. The following month, the exchange announced the appointment of Saurabh Sarkar as Managing Director and Chief Executive Officer. Meanwhile, MCX announced a 70% reduction in transaction charges for agri-commodities with an aim to reduce cost of trading for the agri commodity value chain participants.
Indonesia
In late February, the Indonesia Commodity and Derivatives WWW.ASIAETRADING.COM
IN THE ZONE Exchange signed an MOU with Deutsche Börse-backed Global Markets Exchange Group International. ICDX has also signed a Memorandum of Understanding with the European Commodity Clearing AG, the central clearing house for energy and related products in Europe. The two parties will explore opportunities for ICDX to utilize the GMEX Tech ForumMatch exchange trading platform and ForumDetect market surveillance system.
Japan
Following its launch in January 2013, Japan Exchange Group
and COO. On February 19, the Tokyo Commodity Exchange received authorization to provide Automated Trading Services from Hong Kong’s SFC. TSE fines SMBC Nikko Securities 10 million yen for transgressing Trading Participant Regulations. The Tokyo Commodity Exchange announced 27 February that the official launch date for implementing Standard Combination Orders (SCO) on Inter-Commodity Spreads in the Oil and Chukyo-Oil Markets is March 24, 2014.
Korea
Markit announced 5 February that it has signed an agreement with Koscom, a financial solutions provider based in South Korea, for the latter to distribute the former’s credit default swap data via its terminal network.
Singapore
The European Energy Exchange (EEX) and Singaporean Futures Exchange-founded commodity futures market Cleartrade Exchange (CLTX) joined forces to create a global offering in the commodities sector. The acquisition, completed in December 2013, resulted in a combined group with over 300 members and 10 major asset classes. In early February, IntercontinentalExchange Group, a global network of exchanges and clearing houses, announced the successful completion of its previously announced acquisition of Singapore Mercantile Exchange, following regulatory approval by the Monetary Authority of Singapore (MAS). Also early the same month, MAS and SGX released a joint consultation paper setting out proposals to strengthen the securities market in Singapore. Meanwhile, SGX announced it is revising the fee structure for its securities market to make trading more cost-efficient and to facilitate market making and improve liquidity in the market. The revisions to clearing and depository fees will be rolled out from 2 May, 2014. In late February, the UK and Singapore announced they have agreed to set up a UK-Singapore Financial Dialogue, which will focus on deepening financial and economic cooperation between the two countries. Under the agreement, the UK and Singapore will support the establishment of a private-sector forum to nurture the development of the offshore renminbi market. On 24 February, Singapore Exchange (SGX) introduced circuit breakers in the securities market. SGX announced the launch of SGX Hot-Rolled Coil Steel CFR ASEAN Index Futures and Swap Contracts on 17 February, Asia’s first seaborne steel derivatives.
Taiwan has been working to integrate Tokyo Stock Exchange and Osaka Securities Exchange’s systems. The cash equity markets were integrated onto TSE’s Arrowhead trading system in July 2013, and the derivatives markets are scheduled for integration onto OSE’s J-GATE this March. Deutsche Börse announced on 24 February that the DAX index has been licensed to Nikko Asset Management, a leading independent investment management firm based in Tokyo, to serve as the basis for a passive mutual fund that will be available from March 10. Chi-X Japan announced on 13 February the appointment of Makoto Nagahori as its president WWW.ASIAETRADING.COM
Eurex Zürich AG, a subsidiary of Deutsche Börse AG, is to become a minority shareholder of the Taiwanese futures exchange TAIFEX, subject to regulatory approval. From May 2014, Eurex and TAIFEX will list daily futures based on futures and options on the Taiwanese blue-chip index TAIEX for the first time after Taiwanese trading hours at Eurex Exchange.
Thailand
In mid-February, the Thailand Futures Exchange announced that it will modify its SET50 futures contract to have a smaller contract size, with effect May 6, 2014. The new size of SET50 futures is intended to increase liquidity. March 2014
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COVER STORY 1
by Dan Barnes
AUTOMATION
& DISORDER ASIAN EXCHANGES MUST CATCH UP TO THE STANDARD OF SAFETY SEEN IN OTHER MARKETS, WITHOUT RUSHING SO FAST THEY PUT FLAWED PRACTICES IN PLACE.
arket disruption across several Asian exchanges at the end of 2013 prompted reviews of safety mechanisms and trading rules. High-speed, large volume trades have the capacity to shift the market quickly, and while they may do so for valid reasons, the magnitude of an error or manipulation is increased by automated trading. The causes of disruption in markets last year were varied. A ‘fat finger’ error on 15 August 2013 led to an order placed on the Shanghai Exchange for exchange traded funds, placed by broker Everbright, to move the Shanghai Composite Index by around 6%, according to Bloomberg data. From Thursday 3 October to Monday 7 October 2013, Singapore Exchange (SGX) saw a sudden, sharp fall in the value of stocks for three interconnected firms, which wiped a total of S$8billion off the market. The stocks of LionGold, which Reuters data shows opening S$1.55 on 3 October and closing at S$0.25 on 7 October, Blumont (opened S$2.38 on 3 October, closed S$0.13 on 7 October) and Asiasons (opened S$2.79 on 3 October, closed
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COVER STORY 1 S$0.15 on 7 October) were suspended from trading on 4 October and again on 7 October by SGX “to safeguard the interests of the market as there could be circumstances that would result in the market not being fully informed.” The suspension was met with some surprise and concern by market participants. An official explanation for the fall has not been given by either SGX or the Monetary Authority of Singapore (MAS), which are both investigating. Jenny Chiam, head of securities, Singapore Exchange, says, “Given the confidentiality of information received, MAS and SGX will not be able to share its findings with the public so as not to undermine any potential investigations.”
“
In the US the guidelines that the regulators put out are too vague, they should have been firmer
”
Veronica Augustsson CEO, Cinnober
The events of those few days are currently the subject of a court case (2014 Folio 18) in London’s High Court. A major shareholder of the firms has accused broker Goldman Sachs of selling those stocks which were held as collateral against a loan to the shareholder, after the broker allegedly demanded a loan repayment within one and a half hours and then declared a default when the payment was not met. Goldman Sachs is countersuing at the High Court. In Korea, privately-owned local broker Hanmag Securities fell victim to one of its own trading algorithms going wrong on 12 December 2013. After making many thousands of incorrect options trades the firm was reportedly down around ₩46 billion (US$4.3 million) according to Korean authorities, which exceeded the firm’s capital base of ₩20 billion. Counterparties to Hanmag were typically high-frequency trading (HFT) firms. The Korea Exchange (KRX) failed to cancel the trades although there is a cancellation policy in place which requires both counterparties to reach an agreement; neither Hanmag nor KRX responded to requests for information on the event. The firm has had funds returned to it since by several counterparties including HFT giant Optiver, which has confirmed it returned US$600,000. Luke McElnea, CEO for Asia-Pacific at Optiver, says, “We have long been proponents of effective error trade rules in Korea, and we believe that the Hanmag incident highlights the significant benefit to the market that such rules would provide.” WWW.ASIAETRADING.COM
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COVER STORY 1
BATTEN DOWN THE HATCHES
Exchanges and regulators have reacted to these events with a variety of measures, including the establishment of safety checks already found on many other exchanges. The China Securities Regulatory Commission (CSRC) alleged that Everbright had engaged in insider trading, with incorrect or misleading information supplied to other firms after the initial erroneous orders had been placed, and punished the broker instead of implementing any microstructural changes. The firm was fined 523.29 million yuan (US$86 million) and banned from conducting proprietary trading in the equity and derivatives markets, while several executives were banned from the industry for life. The CSRC said the fine included the confiscation of trading profits of 87.21 million yuan. Singapore Exchange (SGX) announced on 22 January 2014 that it would introduce circuit breakers to prevent sudden falls in value of shares, from 24 February 2014. It had first proposed circuit breakers for the securities market with a public consultation on 7 July 2011 and refined the proposal to dynamic circuit breakers with a public consultation on 12 June 2013.
“
We have long been proponents of effective error trade rules in Korea...
”
Luke McElnea, CEO, Optiver Asia-Pacific
It did not respond directly as to why circuit breakers had not already been enabled on its SGX Reach platform, based on the Nasdaq OMX Inet Genium technology which includes circuit breakers as standard. Chiam says, “Trading engines generally do come with builtin price limits and/or circuit breakers mechanism which are customised to meet market needs.” It has said it will apply them to the component stocks of the Straits Times Index and MSCI Singapore Index, and to any securities –
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such as fund and exchange traded funds – priced S$0.50 and above. These securities account for about 80% of trading on the Singapore stock market. Paul Pickup, director of exchange platform implementation consultancy Trading Technology, says “The linear model of circuit breakers, staging a halt when a price moves more than a fixed amount, for example 50 cents, doesn’t help you with penny stocks. Using a simple percentage of movement as a trigger is more flexible. However penny stocks move a great deal more than other stocks; equity markets are more volatile now than they used to be as a consequence of automated trading and some stocks are more volatile than others. To better manage those factors an exchange has to manually set an equation that calculates when to halt trading.” Veronica Augustsson, CEO of exchange technology provider Cinnober, which built the Stock Exchange of Thailand’s TRADExpress Trading System, says that it is crucial to deliver such safety measures with the right support from authorities. “In the US the guidelines that the regulators put out are too vague, they should have been firmer,” she says. The SGX circuit breakers will trigger if an order is matched 10% away from the reference price from the last traded price at least five minutes earlier. Once a circuit breaker is set off, there follows a cooling-off period for five-minutes in which a price band is imposed. This will only allow trading to occur at 10% either above or below the reference price, before trading resumes at the new reference price. The exchange will also revise its ‘error trade’ policy on 24 February; in effect that means trades for the majority of securities, whose price falls within a price range of 20 minimum bid sizes (or 5%), from the last traded price, will not be cancelled. The policy will not apply to bonds and for structured warrants, the price range will be 20 minimum bid sizes, or 25%, from the last valid price. Any trades that fall outside of the given price range will be eligible for review by the exchange. In addition, the Monetary Authority of Singapore and SGX launched a consultation in early February 2014, ‘Review of Securities Market Structure and Practices’. It contains proposals for a minimum trading price for issuers listed on the SGX Mainboard, collateral requirements for securities trading and short position reporting requirements. It also proposes to increase the transparency of trading restrictions imposed by securities intermediaries and toughening up listings rules. In South Korea, in reaction to Hanmag Securities’ collapse, a proposal was put together by market supervisor the Financial Service Commission (FSC), South Korea’s integrated financial regulator the Financial Supervisory Service (FSS), KRX, and the Korea Financial Investment Association (KoFIA) an industry think tank. The ‘Plan to improve security of derivatives transactions’, released on 17 January 2014, reports that the FSC will push trading firms to strengthen their internal controls, which the FSS and KRX will also encourage. The existence of end-of-day price ceilings and circuit breakers had not WWW.ASIAETRADING.COM
COVER STORY 1 helped in the Hanmag collapse. Currently the closing price must be within plus or minus 10% for the previous day’s closing price for KOSPI Futres and plus or minus 15% for KOSPI options. The circuit breakers stop futures and options trading for five minutes, then impose trading traded based on single price transactions for 10 minutes when the price of KOSPI 200 Futures products with the largest trading volume on the previous day “changes drastically compared to the spot price”. As a consequence, price banding limits will be introduced that will restrict investors to trading within a certain range of the latest traded price during trading hours. A further development will allow the KRX to cancel trades if they pose a threat to the “security of trading settlement” rather than relying on the counterparties, however firms that have placed erroneous trade will be subject to fines. More detail will be forthcoming following a consultation with the industry. KRX spokesperson, AY Kim, says, “It needs revisions to relevant regulations and discussion with industry experts. At the current stage, details have not been finalised.”
ONE STEP BEYOND
Markets that have not experienced any disruption are also said to be looking at deploying additional safety precautions. For example, Hong Kong Exchange and Clearing (HKEx), market operator for the Hong Kong Securities Exchange is reported to be considering the introduction of circuit breakers. A spokesperson for HKEx says, “[it] does not comment on any discussions it might have had with other exchanges. As a member of the World Federation of Exchanges and an affiliate member of IOSCO, the International Organization of Securities Commissions, HKEx has opportunities to learn from the experience of others in its industry as well as the work of researchers who examine the industry.” He continued, “[The firm] continues to monitor developments in the global markets and consider if any measures can further improve the efficiency and integrity of its market. It keeps an eye on a wide range of issues and there have been no conclusions or timetables with respect to circuit breakers.” Augustsson warns that where exchanges are putting such safety measures in place, they must not be complacent about the problems a poorly designed circuit breaker can create. “They can reflect a compromise on quality and price,” she says. “Having a sophisticated circuit breaker demonstrates the quality of the system but unfortunately the trend is that firms don’t prioritise quality, they push something out which is thought to be ‘good enough’ but which creates issues later.” The Hong Kong market, along with India, already imposes a requirement for trading firms to verify and validate the trading strategies and technologies that they are using, in an effort to mitigate disruption. In Hong Kong, these rules have also pushed WWW.ASIAETRADING.COM
responsibility for market disruption onto the shoulders of traders, who can be punished if they fail to show the right level of insight into their operations. In India, these were extended to become the responsibility of exchanges. On 11 February 2014, Maninder Cheema, deputy general manager for the Securities and Exchange Board of India (SEBI) issued a note suggesting that exchanges may advise brokers to put in place mechanisms that would allow them to be more flexible in porting between different trading system vendors, limit over-exposure to a single vendor and make the appropriate contractual arrangements to enable enforcement of the rules where necessary.
“
To better manage [volatility] an exchange has to manually set an equation that calculates when to halt trading.
”
Paul Pickup, Director, Trading Technology
Cheema wrote that exchanges should, “Take necessary steps and put in place necessary systems for implementation of the above; make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision; [and] bring the provisions of this circular to the notice of the stock brokers of the stock exchange and also disseminate the same on their website.” Fred Ponzo, principal at capital markets consultancy Greyspark says that the level of work being undertaken by traders should be matched by the infrastructure. “A big piece of our work in Asia Pacific is auditing pre-trade risk controls for investment banks,” he says. “They typically have extremely complex technology stacks - a firm like Macquarie might have 50+ different trading applications - and they are all trying to get a grip on them. However they should be interacting with an exchange that is safe enough to run. There should be minimum safety standards for market operators.” The introduction of these safety mechanisms is widely supported, however they do change the market dynamic. By signposting a significant change in price while preventing trading, they can escalate the scale of a price change if it is happening for a legitimate reason. “The standard procedure is that a stock goes into a suspended state, which allows the market supervision function to ask what has been going on,” notes Pickup. “If they determine everything is ok, trading continues, but that then gives the game away that there is in fact a massive sell-off or purchase that is affecting the price. Some would argue that works against principle of free markets.” March 2014
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COVER STORY 2
Susumu Usui
Ross Whittaker
David deGraw
“The changes have also impacted intraday market volatility, while spreads have halved and quote size has fallen...”
“Another major reason [for lowering the tick size] was feedback from the trading community, with both buy- and sell-side asking for the change.”
“We see virtually no difference in algorithm performance since the STPP changes, and our slippage remains at consistently low levels.”
Head of Electronic Trading Services, Nomura
Head of AES Japan, Credit Suisse
Head of Algorithmic Trading, Daiwa Securities
By Dan Barnes
TSE TICKS BOX TO PUMMEL PROPRIETARY TRADING SYSTEMS Japan is facing a curtailment of competition in its equity trading markets, after the Japan Exchange Group removed its rivals’ primary competitive edge. The country’s two main Proprietary Trading Systems (PTSs), Chi-X Japan which launched in 2010 and SBI Japannext which launched in 2008, have long struggled to capture liquidity from the primary
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equity market, Tokyo Stock Exchange (TSE). Since its merger with Osaka Securities Exchange in 2010 to form Japan Exchange Group, TSE has implemented a series of reforms to improve its competitive standing. The latest of these is the decimalisation of tick sizes, the WWW.ASIAETRADING.COM
COVER STORY 2 smallest increment of price improvement. Japan has a proportional tick size model, in that the tick sizes applied are affected by the value of the stock. For example, a stock priced between ¥10,000 and ¥30,000 would move in increments of ¥10, while a stock priced between ¥30,000 and ¥50,000 would move in ¥50 increments. The exact bucket in which a stock sits is determined and published by the exchange. The TSE has begun reducing tick sizes, under its Small Tick Pilot Program (STPP), so that they will be 10%, 20% or 50% of the old ones for the same existing respective price buckets. Ross Whittaker, head of AES Japan, at broker Credit Suisse says, “By lowering their tick sizes and normalising their structure with that of the PTS, the TSE has levelled the playing field on this aspect of the trading venue competitive landscape. There were several reasons for the TSE to make the change. The competitive threat of increased fragmentation was one driver for the TSE. Another major reason was feedback from the trading community, with both buy- and sell-side asking for the change.” The process started on 14 January 2014, with tick sizes reduced for stocks above ¥3,000. In practice this covers around 35 of the most liquid stocks of the TOPIX 100 index, which as of end November 2013 made up about a quarter of the TSE’s turnover, according to data from broker Bank of America Merrill Lynch (BAML). Its second phase, planned for July 2014, will be encompass TOPIX 100 stocks below ¥5,000, which at the end of November 2013 comprised about 75 stocks with about 37.5% of the TSE’s turnover. The new tick sizes in this phase will be 10% or 50% of the old ones for each price bucket. Phase 1 has had a significant impact on the market’s characteristics, yet despite being billed as an opportunity to lower transaction costs by decreasing spreads, some market participants are warning that the benefits are not yet apparent.
for Topix100 index to decrease by roughly 5-6 basis points, while the time-weighted daily average total queue size for the Topix100 index has decreased 30-40%. It also reports that the average trade size for Topix100 has halved and the average trade interval for Topix100 index has decreased by 25-30%. If the market follows suit with the PTSs there is likely to be a significant effect on market data and market orders. “As a venue we already experience daily market order volumes of over 40 million, more than the TSE and that is with a 5% market share of trading across all stocks,” says Christopher Orr, head of Sales and Marketing at SBI Japannext. The changes have also impacted intraday market volatility, while spreads have halved and quote size has fallen from around US$1,000,000 to around US$60,000, says Susumu Usui, head of Electronic Trading Services for Japan at broker Nomura. “Intraday volatility has declined while daily volatility has remained the same, so if you trade over the day risk remains the same, but if you over the relatively short term, for example over a one-hour period, then risk is reduced,” he says. “The old tick size was too wide for some stocks and now that you can trade them with finer pricing, volatility has fallen.” As expected, the tick size reduction has had a negative impact on PTSs, and therefore a positive effect for the TSE notes Whittaker. “The market share for the particular stocks that were covered by the Phase 1 reduction, about 32 stocks of the TOPIX 100, has experienced a dramatic decline,” he says. “Prior to the change, the PTS had a combined market share of about a 9.9% for this group of stocks. It is now down to about 4.3%.” Beth Haines, head of Chi-X Japan would not comment on the impact, saying, “It is still early days.”
THE INCUMBENT EXCHANGE HAS STOOD ON ITS RIVALS’ TOES; THERE ARE DOUBTS AS TO WHETHER THEY WILL DANCE AGAIN.
INITIAL IMPACT
Broker Daiwa reports that the first phase of the STPP for the Topix100 has led to the time-weighted daily average spread WWW.ASIAETRADING.COM
However Orr acknowledges the initial impact on stocks of over 3000 yen was more than the PTS had anticipated. “We saw a dip in market share of about 4% but since then the market has been slowly trending back up again on our venue,” he says. “Currently our overall share of Topix 100 is down about 1.9%.” March 2014
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COVER STORY 2 The effect on trading has been far less pronounced, observes David deGraw, head of Head of Algorithmic Trading, Japan at broker Daiwa Securities. He says, “We see virtually no difference in algorithm performance since the STPP changes, and our slippage remains at consistently low levels. However, it is possible that performance will improve with time as our algo analytics normalise to the new tick structure.”
PREDICTIONS FOR STAGE 2 The expansion of the STPP in Phase 2 and beyond will involve the TSE widening the program to the remainder of the Topix 100 and then possibly to a broader universe of stocks in 2015. Many market participants expect the effect to exacerbate the effect on PTSs. Whittaker says, “I have no real reason to think that it won’t have an equivalent effect on the other stocks that are impacted. The early results of Phase I point to significant declines in market share for the alternative markets. When you consider the plans that the TSE has for the future, it does not bode well for the PTS.” However, Orr says, the situation is more complicated than it may first appear. He asserts that a major factor may be the withdrawal of market makers as they take a step back to tweak their trading systems. As a result he believes it may be a few weeks before a better picture of the trend becomes clear. “When the TSE goes decimal tick in July the market makers will have already dealt with Phase 1 and taken the time to tweak their machines so any negative impact could be less pronounced than this time,” he says. PTSs are still hoping that they can combat the negative impact of tick size reduction by tapping a source of liquidity that is currently out of reach. By increasing retail broker participation on their venues they would be able to access and additional 25% of the TSE’s order flow. Many small and medium sized brokers had not gone to the expense of modifying their systems to work with the PTS’s smaller tick size models when they launched as there was no imperative to trade away from the main exchange. With tick size parity across all stocks likely, it seems this barrier will be broken down, facilitating access to the full broker pool. However, Japan’s regulations prohibit margin trading – using borrowed stock – on PTSs. “Around 60% of retail broker flow is traded on margin,” says Whittaker. “While about 25% of the TSE is made up of retail flow, it is largely off limits for the PTS. Until regulations change, then you are still only looking at maximum of 40% of that 25% TSE market share in terms of potential upside [for PTSs].” Nevertheless, Orr believes that the tick size change gives the
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PTSs ammunition to lobby for retail margin trading. He is also bullish about the alternative platform’s competitive ability when facign down the incumbent exchange. “We’re still far ahead of the TSE when it comes to latency; we are 100 x faster than the arrowhead system and 40% lower in terms of effective cost to trade,” he says. deGraw concurs that minimum tick sizes are not the only competitive advantage offered by the PTSs, citing lower ticket/settlement costs, lower latency, unique order types, better FIX reporting, longer trading hours, and unique order flow as areas in which PTSs in Japan continue to add value. He also notes that their ownership structure, such as the consortium ownership of SBI Japannext, can allow greater input and control by the sell-side stakeholders. “[That can] drive changes required to service the needs of their client base and stay a few steps ahead of the exchange,” he says.
THE GRAND PLAN For the regulators to allow any imbalance in competitiveness between the different types of trading venue would seem short-sighted, given the authorities’ support for competition in the first place. However opinions are varied as to the longterm effects of this change upon market structure. Usui is positive: “PTS volume will likely pick up in the near future as market participants adjust their strategies and start enjoying their low latency systems,” he says. Whittaker is more cautious: “PTS will continue to invest in different order types and continue to do more to make platforms more reliable and faster. However, the TSE’s tick size reduction has clearly impacted their major competitive edge.” deGraw is damning: “To me, these ticksize changes were an illconceived knee-jerk reaction to the growing market share of the PTSs,” he says. “To wit, a significant investment of time and money for the technology changes had almost no bearing on lowering transaction costs while pointlessly increasing the market data volume.” He notes that the results of Daiwa’s initial analysis suggest that although the STPP has lowered spreads, it has not necessarily led to a measurable decline in overall transaction costs for institutional investors. “Just because the minimum board spread is lowered, that does not necessarily mean that liquidity will be provided there,” he says. “I think what we see here is that the cost of liquidity in Japan was already fairly efficient prior to the initial changes. Having said that, the marginal cost of liquidity, or queue priority, should continue to decline as the later phases of STPP are implemented this year.”
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COVER STORY 2
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DERIVATIVES
T
he warrants market is the most precious asset of market operator Hong Kong Exchange and Clearing (HKEx), the jewel in its crown as it struggles to compete for primary listings and maintain its regional pre-eminence in cash equity trading. But it is a prize that it needs to protect carefully by ensuring the market maintains its transparency, investors are protected and that regulation does not stifle growth. According to the World Federation of Exchanges, securitised derivative trading volume on the HKEx last year totalled US$395.5 billion, five times the volume on the second most active exchange, the Deutsche Börse, which had turnover of US$71.4 billion. It also dwarfed the volume on Asia’s second largest market for warrants, the Korea Exchange, where turnover slumped to US$26.3 billion after the imposition of restrictions in 2012. “Overall, the HKEx is doing a good job in maintaining the equilibrium of the derivatives warrant market in Hong Kong. It seems reasonably clear that the HKEx will not follow the examples of South Korea and Singapore and restrict market growth,” says Martin Wong, director and head of Hong Kong warrants at Citi. Wong has around 10-years’ equity markets and derivatives experience in Hong Kong, and was hired by Citi in April 2013 to boost the bank’s range and size of product issuance and broaden client coverage. Last year, 18 banks issued these products with UBS, HSBC, Credit Suisse, JP Morgan and Société Générale leading the pack.
Martin Wong
Director and head of Hong Kong warrants, Citi
“It seems reasonably clear that the HKEx will not follow the examples of South Korea and Singapore and restrict market growth.” easy, rapid trading,” says Johnny Yu, head of public distribution, Asia and part of the equity derivatives sales team at UBS. Neither warrants nor CBBCs are subject to stamp duty. Due to leverage, the nominal amount on each trade is less than trading shares, so the commissions paid are lower. Some local brokers also offer special deals on trading warrants and CBBCs where they charge a small flat fee no matter the size of the trade, he notes. Most underlyings for warrants and CBBCs are Hong Kong-listed shares (80-85%), with the Hang Seng Index comprising around 10% and exchange traded fund (ETF) underlyings (including
The strategy makes sense. There were over 7,000
Hong Kong’s derivative warrant and CBBC market preserves its dominance and prepares for further growth.
derivative warrants and almost 9000 Callable Bull Bear Contracts (CBBCs) listed on the HKEx in 2013, according to the exchange, and in the first six weeks of this year more than 1,400 CBBCs were launched. And to give an historical perspective of the deepening and diversification of the market, derivative warrants and CBBCs use more than 160 underlying stocks today compared to just 20 a decade ago. The composition of the market has experienced several changes over the years, not least the participation of more institutional investors, but its intrinsic appeal has remained constant.
Incentives to trade
“They offer leverage and a low initial price which is conducive to
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China A-Share ETFs) making up the balance. In the past, there has also been opportunistic issuance of other underlyings, including for example, the S&P 500, and Apple and Samsung shares. The shortest tenor of a derivative warrant allowed is six-months (three-months for CBBCs) and its minimum price is 25 cents. Issuers can also tap existing warrants, designated as “emulated products”, so effectively tenors can be shorter. Long-dated warrants and CBBCs have less leverage and tend to be more expensive.
Wider investor base
In 2004, the warrants market in Hong Kong was almost entirely comprised of retail investors. Marketing activities were creative, WWW.ASIAETRADING.COM
DERIVATIVES perhaps disturbingly manipulative, with new clients seduced by cartoons and celebrities, and retail participation swelled between 2006 and 2008 amid buoyant equity markets. The 2008 crisis provoked caution among the general public, but provided an opportunity for institutional investors and traders, attracted by low-entry points and preferring the transparency and liquidity of listed markets rather than the uncertainty and counter-party risk of OTC markets during the credit crunch. In Europe, strict rules separate retail and institutional participation in warrants markets, so market makers know the identity of the counterparty to a trade. This is not the case in Hong Kong, so both retail and institutional clients benefit from strong liquidity from active quotes and tight spreads on products.
products sales, HSBC. Retail investors have one principal inducement to buy warrants: it is easy. They can trade warrants and CBBCs using the same account and platform as they buy and sell stocks. A high level of liquidity also attracts retail investors. It is a principal reason why daily transaction volumes have been maintained at around 20-25% on average of the daily transaction volume of individual stock turnover. Investors currently favour warrants and CBBCs over single stocks, indices or ETFs compared to more complex structures such as basket payoffs, and so Hong Kong’s active, transparent exchange for securities which offer leverage really addresses the needs of
By Rupert Walker
“Liquidity in the market [continues to be] boosted by the participation of institutional investors, leading to a more active and competitive market for all participants, including retail investors,” says Wong. An increasing number of arbitragers have entered the market using algos to take advantages of the inefficiencies in the market – although “these are not sure-win arbitrages as the market volatility could back fire on them,” notes Yu. Nevertheless, OTC options markets are the main playground for institutions, where they can implement more complex strategies – especially taking short positions which are prohibited in the listed-warrant market.
investors, argues Wong. “Easy access together with a sufficient level of liquidity to buy and sell, benefit retails investors,” says Chan.
Caveat emptor
Of course, there are also risks for investors but market practitioners are confident that they are being made aware of the danger that they can lose their premium and of the effects of
Keith Chan
Warrants also tend to be more expensive than HKEx-listed options due to their greater liquidity.
Head of listed products sales, HSBC.
“Market competition has led to warrant issuers providing a high level of liquidity to its products through a tight spread and very reasonable size. Therefore, the premium of warrants over listed options is justified. There are also a lot more choices in terms of products (e.g. strikes and expiry) over an underlying security compared to the option market,” says Keith Chan, head of listed
“Market competition has led to warrant issuers providing a high level of liquidity to its products through a tight spread and very reasonable size.“
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DERIVATIVES
Johnny Yu
Head of public distribution, Asia, UBS
“these are not sure-win arbitrages as the market volatility could back fire on them.” leverage, through the combined efforts of both HKEx and issuers themselves. “The products are quite risky, but retail investors are aware of the risks and brokers provide plenty of warnings in their disclaimers,” says Yu, who joined UBS in 2004 and the bank’s warrant operation a year later.
becoming more knowledgeable in terms of understanding of the risks and terms of the products,” says Chan. Quality of issuance is important too. The relatively high listing fees on the HKEx limits the number and range of issued products.
Market growth
“Individual issuers must maximise efficiency by carefully selecting relevant and attractive underlyings, terms and features. A lot of data and investor sentiment therefore drives the issuance of new products – it’s a responsive market,” says Wong. Noise, media attention and momentum are significant drivers of issuance as well. Sectors or individual stocks that are in the news lead to new launches, such as for the Macau gaming sector and Tencent in the second half of last year.
In fact, an investor’s market risk is limited to the premium invested. The exchange does not allow shorting of warrants, which impacts the type of trading strategies that which are available - although
Turbulent stock prices are also a major factor. “When the market is volatile, CBBCs get knocked out so they need to be replaced; for warrants, existing products could become too in-the-money or out-the money depending on the market direction, prompting
put warrants and bear CBBCs enable investors to take bearish market positions.
issuers to issue new warrants with strike levels more suitable to the current share price levels,” says Yu.
“Issuers and market makers must comply with liquidity rules and documents are stringently reviewed,” insists Wong. Warrant issuers have worked with HKEx to produce a “Frequently Asked Questions” document which is posted on the websites of each warrant issuer as well as HKEx.
Brokers are sanguine about future activity and expect new developments, notably in China, that will give a further boost to growth.
The catalyst for tighter control and more uniformity in the market was an incident in 2011 when investors complained about a post-issuance adjustment to the legal document attached to a Nikkei index warrant. The HKEx and market participants met to discuss ways to improve the market, and agreed to standardise legal documents, introduce tighter dealing spreads (5-15 ticks) and install backup plans if market making systems break down. In addition, traders cannot talk directly to customers, who have access to transparent screens and whose calls on broker hotlines are logged. “Warrant issuers have made a lot of effort to educate retail investors as part of their marketing initiatives. Retail investors are
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“One exciting possibility is the development of a listed options market in China which could offer all kinds of market arbitrage opportunities for Hong Kong and mainland investors to tap Greater China exposure,” says Wong. There is a high demand for equity derivative products especially for leveraged bullish or bearish products in China, according to Chan. The availability of stock and margin financing, and the index futures market, are gradually paving the way for an equity derivatives market in China. There is currently no warrant market in China after an experiment a few years ago that saw the prices of corporate warrants surge indiscriminately. But, “the experience and the success of the HK warrant market will surely be a good reference for China when the market is ready to launch covered warrants,” says Chan. WWW.ASIAETRADING.COM
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0 0 0
5
5
5
1150 10
15 15 20
25
20
n
Last Last Series1 200DMA 200DMA Series2 0
0
5
10
15
0.000.00 0
5
5 5.005.00
10
10
1 0.00 1 0.00
15
30 20 20
200 DMA
Last
200DMA
Last 15
1 5.00 1 5.00
20.00 20.00
20
20
25
201 201 3/03/25 3/03/1 3 201 3/03/25 3/04/04 201 201 3/04/1 6 201 3/04/04 201 201 3/04/26 3/04/1 6 201 3/04/26 3/05/09 201 201 3/05/22 201 3/05/09 201 3/06/03 201 3/05/22 201 3/06/1 201 3/06/034 201 3/06/1 3/06/26 201 4 201 3/07/08 201 3/06/26 201 3/07/1 8 201 3/07/08 201 3/07/1 3/07/30 201 8 201 3/08/09 201 3/07/30 201 3/08/22 201 3/08/09 201 3/08/22 3/09/03 201 201 201 3/09/1 3/09/033 201 3/09/1 3/09/30 201 3 201 3/09/30 3/1 0/1 4 201 201 201 3/1 3/1 0/24 0/1 4 201 3/1 3/1 10/24 /05 201 201 3/1 1 /1 5 201 3/1 1 /05 201 3/1 201 3/1 11 /27 /1 5 201 3/1 3/1 2/09 201 1 /27 201 3/1 2/09 2/1 9 201 3/1 201 4/01 /039 201 3/1 2/1 201 4/01 201 4/01 /1 /035 201 4/01 /1 /275 201 4/01 201 4/01 /27
V-KOSPI Index from March 1, 2013
S&P/ASX Volatility Index from March 1, 2013
201 3/03/1 3
25 25.00 25.00
25
March 2014
India NSE Volatility Index from Mar 1, 2013
Mar 01 201 3 Mar 1 3 201 3 Mar 25 201 3 Apr 9 201 3 Apr 1 9 201 3 May 2 201 3 May 1 4 201 3 May 27 201 3 June 6 201 3 June 1 9 201 3 July 2 201 3 July 1 2 201 3 July 24 301 3 Aug 5 201 3 Aug 1 6 201 3 Aug 28 201 3 Sep 9 201 3 Sep 1 9 201 3 Oct 3 201 3 Oct 1 6 201 3 Oct 28 201 3 Nov 7 201 3 Nov 1 9 201 3 Nov 29 201 3 Dec 1 1 201 3 Jan 2 201 4 Jan 1 4 201 3 Jan 24 201 4 Feb 7 201 4 Feb 1 9 201 4
Hang Seng IndexesVolatility Index from March 1, 2013
25 2535
00
5
5
10
10
15
15
20
25
20
30
25
10
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200DMA
Last
Series2 Series2 200DMA
200DMA
Series1 Series1
Last
Last
VOLATILTY
DERIVATIVES
Source: Exchange Websites
TOP 50 Futures Contracts By Volume in Asia for Jan - Feb 2014 Exchange
Product
Vol. Feb 2014
Vol Jan 2014
Shanghai Futures Exchange Zhengzhou Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange National Stock Exchange of India Shanghai Futures Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange MCX-SX Dalian Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Shanghai Futures Exchange Dalian Commodity Exchange Dalian Commodity Exchange Korea Exchange Australian Securities Exchange Shanghai Futures Exchange Multi Commodity Exchange Zhengzhou Commodity Exchange Multi Commodity Exchange Dalian Commodity Exchange Australian Securities Exchange Australian Securities Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Multi Commodity Exchange Shanghai Futures Exchange Multi Commodity Exchange Zhengzhou Commodity Exchange Tokyo Financial Exchange Bursa Malaysia Shanghai Futures Exchange Zhengzhou Commodity Exchange Tokyo Commodity Exchange United Stock Exchange Tokyo Stock Exchange Multi Commodity Exchange Tokyo Financial Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange Multi Commodity Exchange National Commodity & Derivatives Exg. Multi Commodity Exchange Tokyo Financial Exchange
Silver Rapeseed Meal Steel Rebar Soy Meal US Dollar/Indian Rupee Rubber White Sugar Palm Oil US Dollar/ Indian Rupee Soy Oil Coke Flat Glass Pure Terephthalic Acid (PTA) Linear Low Density Polyethylene (LLDPE) Copper Fibre Board Hard Coking Coal US Dollar 3 Year Treasury Bond Gold Natural Gas Rapeseed Oil Silver Micro Iron Ore 90 Day Bank Bills 10 Year Bond No. 1 Soybeans Methanol Corn Crude Oil Zinc Futures Silver Mini Thermal Coal US Dollar/ Japanese Yen Crude Plam Oil Aluminum Cotton No. 1 Gold US Dollar/ Indian Rupee 10 Year JGB Silver Australian Dollar/ Japanese Yen Copper Gold Mini Lead Mini Copper Mini Gold Petal Soyabean Nickel 3 month Euroyen
44,020,752 30,335,278 23,229,200 22,118,584 17,905,111 11,401,450 11,337,552 9,773,490 9,303,514 8,874,308 8,245,930 7,632,458 7,126,262 6,750,206 5,873,920 4,952,178 4,257,476 4,182,965 3,801,265 3,318,082 2,805,197 2,278,094 2,065,691 2,006,974 1,934,821 1,524,088 1,328,990 1,289,860 1,238,860 1,155,354 1,062,456 1,011,003 912,678 791,051 732,305 682,206 633,414 601,426 601,385 569,335 514,432 485,374 450,530 441,010 389,634 358,777 353,308 349,751 349,370 337,747
53,671,008 51,209,252 27,959,020 24,563,666 22,698,718 12,600,100 9,552,102 12,339,248 13,004,207 12,169,766 11,306,256 8,325,248 5,305,140 8,729,748 7,857,344 4,770,872 5,412,680 4,099,652 3,755,274 3,682,672 2,219,000 4,091,098 2,243,299 2,316,612 2,300,109 1,623,282 2,187,446 1,280,004 1,313,668 1,464,598 1,649,152 1,085,978 1,168,012 1,211,028 652,331 572,122 1,057,398 541,515 601,671 646,231 558,711 581,320 575,686 512,240 524,833 459,663 391,028 369,024 441,260 306,942
(9,650,256) (20,873,974) (4,729,820) (2,445,082) (4,793,607) (1,198,650) 1,785,450 (2,565,758) (3,700,693) (3,295,458) (3,060,326) (692,790) 1,821,122 (1,979,542) (1,983,424) 181,306 (1,155,204) 83,313 45,991 (364,590) 586,197 (1,813,004) (177,608) (309,638) (365,288) (99,194) (858,456) 9,856 (74,808) (309,244) (586,696) (74,975) (255,334) (419,977) 79,974 110,084 (423,984) 59,911 (286) (76,896) (44,279) (95,946) (125,156) (71,230) (135,199) (100,886) (37,720) (19,273) (91,890) 30,805
273,695,102
337,957,234
(64,262,132)
Total 18
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Difference
Type Metal Commodity Metal Agriculture Currency Commodity Commodity Agriculture Currency Agriculture Commodity Commodity Commodity Commodity Metal Commodity Commodity Currency Interest Rate Metal Energy Agriculture Metal Commodity Interest Rate Interest Rate Agriculture Commodity Agriculture Energy Metal Metal Commodity Currency Agriculture Metal Commodity Metal Currency Interest Rate Metal Currency Metal Metal Metal Metal Metal Agriculture Metal Interest Rate
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DERIVATIVES
Stock Index Futures Exchange
Index
Vol. Feb 2014
Vol. Jan 2014
Osaka Securities Exchange China Financial Futures Exchange National Stock Exchange India Korea Exchange TAIFEX Singapore Exchange Osaka Securities Exchange Singapore Exchange Hong Kong Exchanges TAIFEX Tokyo Stock Exchange Hong Kong Exchanges Singapore Exchange Singapore Exchange Australian Exchange Hong Kong Exchanges Thailand Futures Exchange Tokyo Stock Exchange Hong Kong Exchanges Bursa Malaysia
Nikkei 225 mini CSI300 S&P Nifty KOSPI 200 TAIEX Nikkei 225 Nikkei 225 FTSE China A50 HHI TAIEX mini TOPIX HSI MSCI Taiwan SGX CNX Nifty SPI 200 MSI SET 50 TOPIX mini MHI KLCI
18,194,898 10,597,177 4,241,677 3,267,909 2,902,168 2,421,362 2,160,102 1,905,960 1,737,735 1,594,962 1,424,040 1,357,300 1,331,778 1,186,686 664,525 511,260 286,111 235,995 225,684 172,788
17,706,640 13,898,835 6,054,449 3,502,271 3,067,800 2,414,030 2,166,590 2,367,462 1,873,672 1,724,062 1,385,295 1,515,320 1,387,018 1,395,983 554,369 548,603 507,060 261,657 225,091 208,575
488,258 (3,301,658) (1,812,772) (234,362) (165,632) 7,332 (6,488) (461,502) (135,937) (129,100) 38,745 (158,020) (55,240) (209,297) 110,156 (37,343) (220,949) (25,662) 593 (35,787)
Total Region
56,420,117
62,764,782
(6,344,665)
Top 5 Gainers
Top 5 Decliners
Exchange
Product
Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange Multi Commodity Exchange Dalian Commodity Exchange Shanghai Futures Exchange
Pure Terephthalic Acid (PTA) White Sugar Natural Gas Fibre Board Aluminum
Net 1,821,122 1,785,450 586,197 181,306 110,084
Top 5 Agriculture Futures Exchange
Product
Zhengzhou Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange
Rapeseed Meal Soy Meal Palm Oil Soy Oil Rapeseed Oil
Total
Net
Exchange
Product
Net
Zhengzhou Commodity Exchange Shanghai Futures Exchange National Stock Exchange of India Shanghai Futures Exchange MCX-SX
Rapeseed Meal Silver US Dollar/Indian Rupee Steel Rebar US Dollar/ Indian Rupee
(20,873,974) (9,650,256) (4,793,607) (4,729,820) (3,700,693)
Top 5 Commodity Futures Volume 30,335,278 22,118,584 9,773,490 8,874,308 2,278,094
73,379,754
Top 5 Currency Futures
Exchange
Product
Volume
Shanghai Futures Exchange Zhengzhou Commodity Exchange Dalian Commodity Exchange Zhengzhou Commodity Exchange Zhengzhou Commodity Exchange
Rubber White Sugar Coke Flat Glass Pure Terephthalic Acid (PTA)
Total
11,401,450 11,337,552 8,245,930 7,632,458 7,126,262
45,743,652
Top 5 Metal Futures
Exchange
Product
Volume
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
17,905,111 9,303,514 4,182,965 791,051 601,385
Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Shanghai Futures Exchange Multi Commodity Exchange
Silver Steel Rebar Copper Gold Silver Micro
44,020,752 23,229,200 5,873,920 3,318,082 2,065,691
Total WWW.ASIAETRADING.COM
32,784,026
Total
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BUYSIDE
BUY-SIDE TRADERS ARE WELCOMING THE EMERGENCE OF ALGORITHMIC TRADING SUITES FOR TRADING IN CHINA, BUT LOOK FORWARD TO BETTER TRANSPARENCY AND EXECUTION TOOLS.
A
record threshold of investment into China was granted to JP Morgan Asset Management on 28 January, when it received Qualified Foreign Institutional Investor (QFII) quota of 1 billion renminbi (US$165 million). This will allow the fund manager to trade Chinese A-Shares – those listed on the Shanghai and Shenzhen stock exchanges – directly via a local broker, rather than using the quotas of external brokers to access the market. Although it has been hailed as a sign that the market is still opening up, the total size of QFII is still under 4% of total China A-share market capitalisation. For long-only buy-side traders, having an in-house QFII, rather than relying on that of a broker, allows them to trade directly onto the market. But this level of access is only the first step in trading a complex and often opaque market. Liquidity in China is concentrated in the blue chip stocks across the two exchanges, Shanghai and Shenzhen. The average daily turnover on Shanghai is around US$14.85 billion, according to emerging markets specialist asset manager, Franklin Templeton, and around $5.59bn on Shenzhen. Domestic fund managers are able to trade directly onto the exchanges through a DMA model, using their broker’s identity, with large orders split into child orders. Hundsun, an electronic trading system provider, is ubiquitous. That causes difficulties for brokers when they try and act as intermediaries. As a result of the DMA model, any trading systems have to be held in-house by the asset manager, a challenge for brokers wishing to provide the algorithmic systems they normally offer as a service. DMA also leads to a lack of information flow, with brokers tending not to give too much colour to traders as a result.
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LIMITED BREAKS FOR QFII FIRMS Until recently only one broker could be appointed per exchange for a firm trading via QFII, however that number has since been increased to three, creating the potential for welcome competition between sell-side firms. “Competition leads to innovation,” says George Molina, head of trading for Asia at Franklin Templeton. “The fact it is very complex to trade with more than one single broker per exchange limits the offerings from brokers when they know or expect business to go to them. It can only improve once we have the flexibility to trade with the best broker at the time and allows us to truly accomplish best execution.” Even with the change in regulation, custodian banks still often insist on the same broker being used for a sell order on a given stock as was used for a buy order. Custodians on the mainland act primarily as depositories, and will not handle the cash side of trading which creates an extra layer of complexity. Some of the challenge lies with the brokers, as well as with the custody model, as the brokers could potentially become more effective at working on the same client. Jacqueline Loh, head of Asia trading at buy-side firm Schroders, says, “Despite the increased allowance of brokers one can use, the actual number of brokers used will still be limited by their operational capability. This is especially the case for switching orders where the sell orders are on one exchange and the buys on another; the limiting factor here is the time taken to transfer funds from one broker to another.” Lee Bray, head of trading for Asia Pacific at JP Morgan Asset Management adds, “Given [the custodian model] we have to be realistic and say things will evolve slower than they may have otherwise. WWW.ASIAETRADING.COM
BUYSIDE As time goes by and people become more comfortable with the model I am sure that these constraints will be resolved.” The lack of intermediaries in the trading business onshore, also impacts the information that can be supplied to offshore firms. Order flows are generally advertised per sector, as opposed to for specific names, which makes sourcing blocks considerably more difficult. “Contact tends to centre on stock specific news rather than focus on crossing stock,” says Bray. “The domestic Chinese broker offerings are making good progress and have moved forward enormously in recent years. At this time it would be very helpful if they could work towards making it easier to cross stock, but given some of the constraints explained above it would seem that this is a way off.”
NUTS AND BOLTS OF TRADING The mechanics of trading in China have several differences from those of other markets. Intraday trading of a stock – both buying and selling – is not permitted, and equities are only able to move within a 10% price band during the day. “Trading in China A and B shares is fairly basic,” said one head of Asia Desk for a global asset manager. “All of our trading is through the cash desk with the sales trader as normal single stock executions as per other markets i.e. Hong Kong with p-notes being used from time-to-time. Currently, we do not have access to DMA/algos with our local Chinese brokers, in fact I am not sure if any brokers can offer such electronic trading access.” There are very few block trades available on the mainland market as a result of the DMA trading with large orders broken up without any broker intervention. “The sales-trading role is in its infancy stages,” says Molina. “Services are improving and the Citic/CLSA, UBS, GS/Gao Hua tie-ups will go a long way into bringing sales trading to the forefront.” “If they have QFII, an asset manager has to go directly to an appointed local broker,” said a sell-side head of electronic execution for a large Asian broker. “I can’t get in the middle of that. However some of the big global brokers who have local joint ventures are now able to offer algo suites in the global sense to their QFII clients.” These global sell-side firms are making inroads, working with domestic and overseas buy-side firms to educate their traders in the advantages that brokers can offer, and to demonstrate how electronic trading tools can deliver better execution. The experience that domestic portfolio managers have of trading directly into the market themselves is cited by UBS as creating a relatively mature understanding of how placing orders in the market works. The broker’s electronics trading team note that its WWW.ASIAETRADING.COM
early entry into the market has enabled it to offer domestic mutual fund managers access to algorithmic strategies. Having tested the product successfully over the course of several years, the platform has been extended to the broker’s internal proprietary desks, using UBS QFII to pass orders into markets. The final phase which has been developed and offered over the last 18 months is the ability for institutional QFII licensed fund managers to pass orders into the market via the UBS worked order desk and through the electronic execution desk, utilising the algorithmic strategies that UBS offers.
INCREMENTAL IMPROVEMENTS Bray says that such developments are to be supported. “We would certainly encourage these types of innovation as the more touch points we have to access the markets the more flexibility we have,” he says. “Obviously some brokers have had more success than other, with UBS being one of them. There are broker licensing issues, which make things harder for those brokers who wish to enter into the electronic space. There is also a learning curve which brokers are move up in terms of experience in the space. Over time these things should work through and I envisage the algo offering of brokers becoming an integral part of the trading tool kit in China.” He notes that Hundsun has worked with brokers to place electronic trading suites in the ISV’s front-end for domestic fund managers, which has facilitated their access into the market. Nevertheless licensing issues and the fact that that the algo engine has to sit on the client side do create issues and extra complexity. Other traders from asset management firms are also keen to see new tools, such as transaction cost analysis, delivered in China, to assist with execution transparency and quality. “[It] would allow global firms to analyse execution quality in comparison to other Asian markets after adjustment for variables like spread, volatility and percentage of median daily volume,” says Loh. The process of change is inevitably slow, in keeping with China’s cautious approach to developing its markets. JP Morgan AM’s QFII provision of late January has made little impact on the way that it trades into China yet, due to the operational complexities in the market that must be overcome first, says Bray. “[There are] technical issues around areas such as cash management and staying within quota when using multiple ID’s, as well as some of the challenges faced on the broker side due to brokers capabilities in actually implementing,” he says. “Clearly [as advantages] there is a cost differential between one’s own QFII and using others. Other obvious factors are accessibility, we would hope to see things improve as time passes.” March 2014
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REGULATION By Steve Price
S
luggish trading volume has prompted Taiwan’s Financial Supervisory Commission (FSC) to loosen the regulatory spigot. But capital gains tax amendments and the introduction of day trading have so far had a limited impact on participation, with some securities houses continuing to struggle in a highly fragmented, competitive market, and many looking to China as a source of business expansion.
charge, but after the stock market slumped by some 35% in the month following the announcement, the plan was shelved.
“The effect of the capital gains tax on trading volume has been significant,” says Cherry Huang, Director, Financial Institutions, Fitch Ratings Taiwan. “In mid-2013 there were some amendments to ease the impact on the capital markets, but the result was not satisfactory.”
In June 2013, the legislature removed the index threshold that triggered capital gains tax for individual investors. Under the changes, which will come into effect in 2015, individual investors who sell US$33.3 million in shares within the calendar year will be liable to pay either a 15 percent tax on the capital gains, or a 0.1 percent tax on their stock trades over US$33.3 million.
Eyes are now on a proposed economic free trade zone and further cross-strait liberalization to inject new impetus into Taiwan’s capital market, though details of the former have yet to be divulged, and legislation regarding the latter has become the focus of intense political debate.
SLOWING DOWN From 1990 to 2012, securities transactions were exempt from capital gains tax. To broaden the tax base and increase revenues, the government introduced a levy on stock, bond and derivative transactions from 2013, in a ham-fisted policy initiative that prompted then finance minister Christina Liu to fall on her sword. The government had considered in 1988 introducing a similar
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“Based on our dialogue with local broker/dealers, after the regulation was announced and implemented in 2012, most large-scale investors started to remit investments offshore,” says Huang. “It’s not easy to get those funds back.”
A 15 percent tax, calculated on actual gains earned from IPOs, will apply to investors who sell more than 10,000 shares from IPOs, and those who sell more than 100,000 shares in emerging markets. Prior to the amendment, individual investors were to be charged capital gains tax of between 0.1-2.25% on share trades if the TAIEX were trading at 8,500 points or higher.
DAY TRADING Against the backdrop of lackluster volume, the FSC allowed from 7 January 2014 the day trading of securities. “When the market suffers, the regulator tries to relinquish some control,”says Ricky Hsu, WWW.ASIAETRADING.COM
REGULATION Assistant Vice President Investment Banking, KGI Securities. “But since the philosophy of the regulator is very conservative compared with Hong Kong and the US, it’s not really a free market. Most traders in Taiwan are not longfund traders, so this is a good mechanism for them, especially local traders. ”
capital market,” says Sophia Chen, Director, Financial Institutions, Fitch Ratings, Taiwan. “There’s been talk about NT$100 billion coming from China to Taiwan. And RQFII is being discussed under the Trade and Services Act, which has to be approved by the legislature before it can be implemented.”
The introduction of day trading has had a greater effect on trading volume than the easing of the capital gains tax.
In June 2013, China and Taiwan signed a Trade and Services Agreement that includes farreaching relaxation of finance regulation, but ratification of the pact has been delayed by opposition to the agreement in the legislature. However, with economic ties expanding between the neighbors at a quickening pace, greater financial integration looks inevitable.
“It’s easier now for retail investors to get out of a stock if they decide they made a wrong call,” says Solomon Chang Head of Global Equity, Cathay Securities Corporation. “That’s led to an increase in turnover, which from early 2014 has increased about 10-20% on a daily basis.” However, weakening volume is not only attributable to regulation, as fundamentals are playing their part, too, says Chang. Taiwan’s market is still very tech centric and with high exposure to PC, for which demand has recently slowed, there’s a dearth of exciting stories. Besides, Taiwanese investors are growing more interested in investing offshore. In the fourth quarter of 2013, the net outflow of Taiwan’s financial accounts reached a record high of US$13.88 billion, the Central Bank reported late last month in a statement issued to allay concerns that the exodus could dent already weak market sentiment. The bank attributes the outflow to increased overseas investment by domestic insurance companies and local investors. “Previously a lot of financial products were not permitted to be sold in Taiwan,” says Chang, “which has prompted Taiwanese investors to open up overseas accounts with other brokers. That means Taiwan’s financial institutions aren’t benefitting, and are not taking those fees. Once that opens up, Taiwan’s brokers will be allowed to sell overseas products.” Following in the wake of China’s much-touted Shanghai free-trade zone late last year, Taiwan’s government has renewed its drive to create its own version in the aim of joining the Trans-Pacific Partnership (TPP). The zone would include financial services. Under the scheme, offshore banking unit business will be relaxed. Foreign banks in Taiwan are positioning themselves for the move by beefing up their IT systems and going on a hiring spree to capture the wealth management opportunities that being allowed to offer a full product lineup will create. Taiwan’s cabinet has said it expects the zone to generate a respective US$990 million and US$1.32 billion for banks and securities houses over the coming five years.
THE CHINA STORY But perhaps the biggest potential boost to participation lies across the Taiwan Strait. At the end of January 2014 the Securities and Futures Bureau said the cap on QDII would be doubled to US$1 billion, and last month China said it is revising regulations to allow QDII funds to trade derivatives in Taiwan. “QDII is a major development because we have been expecting a pull of funds from China into Taiwan to bolster the domestic WWW.ASIAETRADING.COM
“I’m quite positive on Hong Kong, China and Taiwan becoming a Greater China market,” says Chang. “A lot of people in Taiwan have friends or family in China, which means Taiwanese investors know about China, and renminbi deposits in Taiwan are increasingly rapidly, which will allow Taiwan’s capital market to roll out reniminbi products.” Taiwan’s brokerages are already dipping their toes into the water, with many jockeying to take a piece of the IPO pie as Chinese companies discover that it may be easier to list in Taipei. “We are in China contacting clients who might be interest in listing in Taiwan,” says Hsu. “It’s easier to find financing in Taiwan, and the money is cheaper. The inflation rate is low, and economic growth is low, so the conditions aren’t present to raise the interest rate.” What: Cross-Strait Agreement on Trade in Services, which follows on from the Economic Co-operation Framework agreement implemented in 2010 Who: China and Taiwan When: Signed on June 21, but ratification being held up in Taiwan’s legislature because of opposition to growing closeness of relations between Taipei and Beijing Highlights: • More than 100 service sectors to be opened up, including financial services, such as banking and broking • Taiwanese companies would be allowed to have controlling stake in China JVs • Taiwan-invested financial institutions are permitted to invest in mainland’s capital markets via RQFIIs • Taiwanese investors permitted to invest up to 51% in one joint venture securities firm licensed to provide full services in Shanghai, Fujian Province, and Shenzhen • Single Chinese bank allowed to own 10% of a Taiwan-listed bank or financial holding company • QDII quota for investment in Taiwan’s capital market increased to US$1 billion What: Day trading permitted in 200 large- and mid-cap stocks on the Taiwan Stock Exchange and the OTC market. Previously, day trading was allowed for short selling and margin trading only Details: The stocks comprise the constituents of the FTSE TWSE Taiwan 50 Index, FTSE TWSE Taiwan Mid-Cap 100 Index, and GreTai 50 Index, and include Taiwan Semiconductor Manufacturing Co, United Microelectronics Corp, Formosa Plastics Corp and Evergreen Marine Corp When: From 7 January, 2014 March 2014
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WHO'S WHO
INDRIANI DARMAWATI Asia Etrader sat with Indriani Darmawati, Director PT Kliring Penjaminan Efek Indonesia (KPEI) the wholly-owned clearing house of the Indonesia Stock Exchange for some insight on the latest developments on one of the key ASEAN pillars. She discussed how the capital markets having been evolving in Indonesia, the challenges of developing a reliable clearing house. She further looks at electronic and algorithmic trading, securities borrowing and lending (SBL), shariah finance, the implications of Dodd-Frank and EMIR and the future of Indonesia’s capital markets. Asia Etrader: How did you get started in Asia’s capital markets? Indriani Darmawati: In 1990, after finishing at the University of Indonesia, I joined the clearing house and depository, which at the time was one institution. Then I joined Citibank in Switzerland for an internship of almost two years. I then returned to Jakarta and joined KPEI, the clearing and guarantee institution. I’ve been there almost 16 years. AE: How has Indonesia’s capital market changed over the past five years? ID: They’ve changed a lot in terms of volume, frequency and values. We’ve experienced a tremendous increase in recent years. However, there have been some cases of fraud involving the misuse of clients’ assets. In 2008, when the market turned down, we found out that some brokers had been using their client’s assets for their own interests. If the market hadn’t turned down, then I don’t think we would have found out about those brokers. Because of that fraud we implemented several initiatives. In 2012, we introduced a stock exchange mechanism called straight-through processing (STP) using client ID for trading, clearing to settlement. Before that, clearing and settling were conducted at the broker level. Now furnished with IDs, clients can also check their positions in central custody, and compare their positions with the statements from their brokers. Exchange transaction processing became more
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“If the stock isn’t liquid and it’s categorised as a risky stock, and we have the history of that kind of stock, why should we guarantee that stock?”
seamless and with minimum human intervention. AE: What are the challenges that KPEI faces in Indonesia? ID: Several rules and regulations need to be improved, particularly in regard to securities lending and borrowing. We want to enhance our business, not only to cover settlement, but also to cover the other side of the transaction process. On the supply side we lack the lenders’ pool because no regulation supports pension funds or insurance firms lending their securities. Also, we need to develop our technology because we are now dealing with clearing and settlement at the client level. We only have a small number of investors, but in the next two to three years there might be an increase, which means that we need to have enough capacity. We also want to minimise operational risk for clearing and settlement, improve stock lending and borrowing, and the clearing and settlement process. Based on data from the central custodian, our investorlevel IDs number some 300,000. If in the next two to three years investors increase to 1,000,000, we need to ensure our system can cope. WWW.ASIAETRADING.COM
WHO'S WHO
“there have been some cases of fraud involving the misuse of clients’ assets.”
The most important change would be preemptive action and isolated trade. That would mean we would have the decision on what stock would be guaranteed and which would not be guaranteed. All the brokers will know which stocks are guaranteed by KPEI. The list of stocks will be decided together with IDXTherefore, if something happens with that stock, we don’t guarantee it. Currently, all stocks listed on the exchange are guaranteed by the clearing house. Every stock listed on the regular market is 100% guaranteed by KPEI. Sometimes, our members pledge collateral with 100% haircut (not valued as collateral). As a risk manager in Indonesia’s capital market, we ask for collateral to guarantee the transactions of our members, so we want liquid collateral. This would increase the safety of our market. We currently have the capability to distinguish between risky and non risky stocks. If the stock isn’t liquid and it’s categorised as a risky stock, and we have the history of that kind of stock, why should we guarantee that stock?
AE: What are the challenges of participation in the ASEAN link? ID: I can’t say much because that’s the domain of the exchange. Indonesia hasn’t joined the link yet. We will support whatever IDX supports. AE: Is the Indonesia securities industry embracing electronic trading and algorithmic trading? ID: IDX doesn’t use a trading floor anymore and everything is done remotely. We are seeing an increase in online trading. More and more securities companies are aware that they need to invest in technology to provide online trading. But only some 20 securities companies out of some 130 engage in algo trading. There have been cases that have highlighted the challenges algo trading can create. AE: What are some of the regulations currently being considered for improvement? ID: We have proposed the Indonesia Financial Services Authority to revise regulations concerning the guarantee fund, and to add preemptive action and isolated trade to permitted activities. We are also proposing for permission to have third-party clearing, meaning we would have two types of membership: general clearing members and individual members.
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WHO'S WHO AE: Can you tell us about the MoU between KPEI, KSEI and Korea Securities Depository (KSD)? ID: The agreement signed on December 19 2013 is between three parties; KPEI PT Kustodian Sentral Efek Indonesia (KSEI) and with the KSD and is intended to assist us to implement and enhance our securities lending and borrowing. The agreement covers bilateral securities lending and borrowing and repurchase agreement advisory services. During our research, we found that foreign securities depositories have a good track record of liquid bilateral securities lending and borrowing. We have a good relationship with the Korean depository. We therefore sought advice on the model to follow for SBL, especially bilateral transactions. Foreign brokers have expressed interest for us to offer SBL at an international standard. We’re looking at whether we need regulations concerning foreign brokers, or whether they could borrow and lend through their subsidiaries. AE: Why has there been a focus on SBL in Indonesia? Is short selling an important mechanism? ID: Short selling is an important mechanism in order to have an active SBL market. In Indonesia, if you want to do short selling, you need to have an SBL agreement with KPEI – that’s important as it’s not naked short selling. SBL mechanism in short selling transaction gives investors short selling facility with greater safety of transaction. AE: What are the effects of the US’ Dodd-Frank and Europe’s EMIR on Indonesia’s capital market? ID: In summary, they oblige participants in OTC derivatives transactions with third parties to report to the CCP. That doesn’t affect Indonesia’s capital market much as we don’t have any active third-party market. It’s still being developed by the exchange, however. The role of CCPs is very important, and that’s why we are learning from Dodd-Frank and EMIR. We want to increase our compliance to international standards, especially once we have an active OTC derivatives market.
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AE: What are some of the concerns surrounding derivatives products and how are they being addressed? ID: Firstly, education of brokers and investors is paramount. We have to work on that. They already know about equities, but we should focus more effort on educating investors and brokers, to create a more liquid market. Because supervision of financial institutions is now under one organisation, the FSA, banking, capital markets, insurance firms, and pension providers, etc, problems will be addressed more efficiently compared to the previously fragmented setup. We want insurers and pension funds to be able to participate in lending and borrowing. And now that there is one body in charge, working out a model will be easier. AE: How important is developing the Shariah market for Indonesia? ID: It’s very important because some 90% of the Indonesian population is Muslim and investors are becoming more aware of Shariah-compliant investing. Previously, they may not have known so much about it. There is a growing awareness, especially amongst the younger generation. But Indonesia is a secular country, so regulation WWW.ASIAETRADING.COM
WHO'S WHO
“We are also proposing for permission to have third-party clearing, meaning we would have two types of membership...”
is not based on Islamic principles. IDX has already gained permission from Indonesian scholars, in the form of a fatwa, for Muslims to invest in Shariah-compliant securities. This is positive as some potential investors might not be sure whether such investment was permitted. Some could see such investing as gambling, which wouldn’t be compliant.
AE: What are some of the operational differences when clearing Shariah-compliant and non-Shariah compliant securities? ID: In terms of clearing, there isn’t a difference. What we have now is that in the stock exchange, Shariah companies are indexed. Then there are mutual funds, and the investment manager provides Shariah-compliant mutual funds. For us to do clearing and guarantees, we don’t differentiate between Shariah-compliant and non-compliant securities. AE: What are KPEI’s future plans? ID: We have several building blocks and initiatives to support exchange trading. We have risk management blocks, and WWW.ASIAETRADING.COM
“For us to do clearing and guarantees, we don’t differentiate between Shariahcompliant and noncompliant securities.”
collateral management blocks, and securities financing blocks. Our vision for the next two to three years is to improve our collateral management services and focus on securities financing, especially bilateral SBL. March 2014
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O&A
TICK SIZE REFORM: THE SILENT REVOLUTION
PIERRE MAAREK & NICOLAS POITEVIN FROM THE QUANTITATIVE TRADING ASIA TEAM WITHIN SOCIÉTÉ GÉNÉRALE’S GLOBAL EQUITY FLOW BUSINESS BACKGROUND
In terms of market structure, Asia is different. Alternative venues are in their infancy even in developed market such as Japan. High frequency trading (though hard to measure) represents a lower share of overall volume than in the United States and Europe. Yet the most distinctive feature is one that may seem trivial: the grid on which the price is allowed to move, also called “tick size”. Both developed and emerging Asian markets display ticks that are much larger than elsewhere, with profound
trading implications. The pressure to reduce it has been strong and exchanges are taking major steps in this direction.
SIZE MATTERS
How do we define “large”? Tick is too large when you start to notice it. In technical terms, it means that the underlying price process becomes constrained by these minimal increments. If people were forced to set the price at which they sell their private car by $10 increments, few would hardly notice. Indeed,
Source: SG Research
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O&A
Japan stock typical tick size (%)
Indonesia stock typical tick size (%) JCI Index Weighted
0.80% 0.60%
TOPIX Index Weighted
0.10%
0.40%
0.05%
0.20% 0.00%
0.15%
Previously
Since Jan 6th
0.00% CurrentP
hase 1 (Jan 14th )P
hase 2 (Jul 22nd)
Source: SG Research
cents are already constraining most prices without raising much complaint. But make the increment $1,000 and most transactions would be hindered! A good yardstick is therefore the tick size expressed as a percentage of the price ($10 is a large increment for a dinner in town while $1,000 would be small if applied to a house). That is because the scale over which the price process needs to evolve is compared to this minimal step. Without naming it, what we just introduced is volatility. If uncertainty regarding the price of an asset is high enough, large ticks aren’t too restrictive anymore. For this reason, the time to tick of a stock is a relevant benchmark. It is defined as the typical time it takes for the best price (bid or offer) to change. The following charts provide figures on the relation between time to tick and both tick size and volatility for the Japanese Topix index.
ONE SMALL STEP FOR PRICES
If prices can’t adjust, quantities will. This would typically generate surplus or shortage. Such effect takes place in the order book in the form of long queues and one-tick spreads. For example if the minimal increment is 1 ¥, buyers would end up queuing for long periods at 100 ¥ while sellers are also piling up at 101 ¥. Participants implicitly willing to settle between 100 ¥ and 101 ¥ face the choice of queuing up (and getting a chance to trade at a better price than the one they target) or accept to buy (sell) instantly at a premium (discount). The implication in terms of trading is significant and exchanges are facing pressure to reduce tick size. On January 6th 2014, the Jakarta Stock Exchange revised the tick size down. The move brought the weighted-average size of the minimal increment from a staggering 0.75% to a more reasonable 0.29%. The figure is still high and makes Indonesia one of the most constrained market in Asia, but it is a step forward. The Tokyo Stock Exchange has decided to go on a cautious multi-step approach divided in two phases and limiting the change to members of the TOPIX100. WWW.ASIAETRADING.COM
ONE GIANT LEAP FOR MICROSTRUCTURE
The impact of this “gradual” reform on the largest market in Asia is deep, with profound trading implications. Japan’s top 100 names represent as much as 2/3rd of the TOPIX in terms of weighting. Though limited in appearance, Phase 1 (Jan 14th 2014) brings Japan much closer to other developed markets (Europe / USA) with index-weighted tick of only 0.097%. Phase 2 (Jul 22nd 2014) should reduce it further to 0.068%. At these levels, specific “Asian microstructure” becomes a thing of the past for Japan. We expect time to tick to be reduced by as much as 70%. Note that we talk about the average tick and not the average spread, which may reduce to a lower extent.
WHAT DOES THIS MEAN FOR OUR CLIENTS?
Like all major changes, this reform will have positive or negative impact on participants depending on their positioning. The naïve view that tick reduction is “good for everyone” is similar to the proposal that narrower spreads mean better performance for all. We expect the reform to be good news for the buy side, as they tend to prefer better price access. High frequency flow may thrive at the expense of more traditional forms of market making, which is clearly not a client interest. We also think that this improvement won’t be at the cost of available liquidity which will apparently reduce on the touch but won’t change on medium term, as we are talking about the most liquid stocks of Japan.
SG IS PREPARED FOR CHANGE
Asian microstructure makes execution expensive for unsophisticated traders. The consequence of long time to tick effects is that risk aversion is costly and basic order slicing logics suffer. Societe Generale’s algorithms have been designed to cope with both large and small ticks in an efficient manner, using dedicated behavior for each structure. Leveraging on a global platform, it draws on experience in the March 2014
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OPINION POLL
DO YOU THINK JAPAN’S PTSs WILL BE AFFECTED BY THE TSE TICK SIZE CHANGE? No, not at all Not Sure Yes, negatively Yes, positively
T
he JPX group continues to evolve and mature into a world class trading destination. The consolidation of cash equities was completed and now the exchange is addressing its tick size to be in line with the international standards and remove one of the competitive advantages of the PTSs. The Japan FSA has not mandated a standard tick size across the liquidity pools unlike in Australia but we think that this is likely as best execution and a national best bid and offer policy should be forthcoming. Afterall, retail is coming back to the market and they will need protecting. The PTSs have been able to offer price improvement over the JPX because of their smaller tick sizes but will this be the case when the JPX matches the PTS ticks? Just over 50% of those who voted thought that the impact to PTSs after the tick size change would be negative appear to be right at least in the early stages. When measured by market share, our Fragmentation Footprint (see pg.36) shows that the PTSs have lost some of their market share since the Small Tick Pilot Program kicked of in early January. The Frag report also revealed greater price improvement to the benefit of the buy-side and perhaps could lead to greater interest in PTSs and the belief that they do offer value outside of the primary.
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Just over 20% of those that voted weren’t sure what the TSE tick price impact would be. While alternatives aren’t exactly new to Japan their legitimacy has been questioned at least in the domestic market where the concept of capturing the spread isn’t really a consideration for fund managers. But that is changing as Japan’s performance has not been that great and gaining a few bps of alpha with a better price could put a manager in a higher quartile relative to peers. Fewer than 18% felt the tick size would benefit the PTSs. It would be good to ask those participants why they felt that way. Tick size advantage has always been one of the key selling points. There were some who felt there would be no impact at all with 10.26% of the votes. We can only speculate as to why. We don’t think this will spell the end of the PTSs as offering only smaller tick sizes can’t be the only business model. We can look at Chi-X Australia which has captured market share in the low teens and they have always been subject to the same tick size as ASX. Price improvement based on tick size was the story before but now it seems price improvement based on finding liquidity will be the mantra now. WWW.ASIAETRADING.COM
WORD ON THE STREET
WHAT DO YOU THINK ABOUT SGX MOVING TO T+2 SETTLEMENT?
Sam Ahmed Head of Collateral Services Sales APAC, Citibank “Singapore’s adoption of a T+2 settlement can potentially act as a catalyst for the rest of the region to undertake measures in moving towards a similar settlement cycle. Furthermore, as CCPs around the region are being developed for the OTC market, SGX’s move towards a T+2 settlement can be seen as a broader move to strengthen best practices across their OTC and securities infrastructure in order to attract potential investors and new members.”
Alexandre Kech Director, Securities Market Infrastructures, APAC, SWIFT “This move is part of a global trend. Five Euroclear markets will be on T+2 in October 2014 in preparation for Target 2 for Securities (also on T+2). The US and Australia are currently consulting on the subject. Other markets like Germany and Hong Kong have already adopted it. No doubt that this trend will continue to spread globally. A shorter settlement cycle does reduce operational and counterparty risks significantly, it enables a more efficient use of assets. But only if it comes with effective pre-matching and fully standardised automation from trade order to settlement. Standardised post-trade matching on T+0 between the buy-side and the sell-side is a prerequisite to accomplish an operationally risk free T+2. Securities Market Infrastructures also need a robust, reliable and automated infrastructure speaking ISO with its participants. SWIFT is working on both fronts with its community and with Exchanges such as SGX, ASX and others in Asia to provide matching solutions, standardisation and automation.”
Geoff Harries Global Head of Asset Servicing, DST Global Solutions “The move to a T+2 settlement cycle in Singapore, and consultations being held across other Asian and European countries, is having a huge knock on effect to operations and many investment managers and banks are simply not ready yet. They will have to either resource up to handle the tighter settlement deadline or think about how they can automate the settlement process if they want to transition to the new rules painlessly. The impact will be felt across the entire trade lifecycle and will drive moves to same day affirmation for trade confirmations. Simply growing headcount could pose huge operational risk, let alone cost, especially in times of high volume and volatility where man-powered operations cannot scale and are prone to human error. Technology is key to achieving operational efficiency since it will automate the confirmation and settlement cycle, maximise straight through processing and focus operations on exceptions driven oversight, giving the ability to easily scale. Singapore will not only have to think about their own shortening of the settlement period, but also be able to adapt to trading other geographies who are also implementing this change.”
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O&A
KEY POINTS • • • •
Tokyo Stock Exchange has introduced a ‘Small-Tick Pilot Program’ to reduce bid-ask spreads Changes in tick sizes will be implemented over three phases, with Phase 1 starting from 14 January 2014 We expect the proposed changes to reduce spreads in Japan by 80% over the next 18 months Smaller spreads would benefit investors by reducing execution costs, but affect Dark pools and HFT negatively
The PTS markets in Japan, Chi-X Japan and SBI Japannext, have always supported decimal tick sizes. However, after a brisk growth in 2011, their market share has remained stable between 6-8% over the past two years. With a reduction in tick sizes at TSE, these alternate venues will have to identify new ways to differentiate themselves and remain competitive. The adoption of the smaller tick sizes will force many small domestic retail brokers in Japan to make the Technology system changes necessary to support the new tick sizes. Up until this point, the expense associated with the system changes has prevented this group of brokers from supporting the PTS tick sizes and, as a result, has prohibited them from trading on the PTS. If PTS markets are successful in onboarding this new pool of potential trading participants, the addition of more member firms may help to offset the loss of competitive positioning vis-à-vis the TSE.
Execution costs
We expect that average spread for TOPIX100 will decline from 14.5bps to 8bps after Phase 1, and to 2.5 bps after Phase 2 in July 2014. The
J
SQUEEZING THE
apan, trading $25 billion/day, is the second largest market globally after US. However, large tick sizes have created one of the widest spreads amongst developed markets (4x the spreads in US), making it an expensive market for institutional investors.
Heeding to investor demands, Tokyo Stock Exchange (TSE) will be initiating a three-phase reduction in tick sizes from 14th January 2014. The new tick structure reduces tick sizes by 50-90% and is expected to reduce average spreads in Japan by as much as 80%.
Phased approach to changes
decline in TOPIX 500 will likely be 30% and 50% after Phases 1 and 2 respectively. Nikkei 225, being a price weighted index, will see a 50% reduction in spreads after Phase 1, but will be relatively unaffected by Phase 2. We expect an 80% decline in spreads across all 3 indices in mid-2015, assuming Phase 3 maintains the same tick structure as Phase 2 and extends it to all stocks. Spreads are closely correlated with market impact costs (see Trading Less Competitive Markets is Costly for more). In addition, as highlighted in our report How Much is Market Structure Hurting Investors?, all changes have ripple effects which add complexity to the market structure and trading pattern of market participants. We highlight these effects below and their possible impact on the Japanese market structure.
The tick size changes will be implemented in three phases over a period of 18 months. • Phase 1 will be a pilot phase going live from Exhibit 1: Current & New Tick Sizes after Phase 1, 2 14th January 2014. It will cover stocks from Quote Price Current Tick Phase 1 Tick % Difference TOPIX 100 and reduce tick sizes only for stocks Below (¥) Size (¥) Size (¥) From Current with quote price above ¥3000. Due to the high 1 1 1,000 concentration of stocks with lower market price 1 1 in TOPIX, this pilot phase is expected to only 3,000 impact around 40 stocks. 5 1 5,000 80% • Phase 2 is scheduled to commence on 22nd July 10 1 10,000 90% 2014 and will continue with the same universe 10 5 30,000 50% of stocks, i.e. TOPIX 100. It will introduce sub-Yen 50 5 50,000 90% tick sizes for stocks trading below ¥5000. 100 10 100,000 90% • Phase 3, expected in mid-2015, will be based on 100 50 300,000 the tick structure of Phase 2. However, TSE will 50% announce the final tick sizes and list of target stocks 500 50 500,000 90% after evaluating the impact of previous 2 phases. 1,000 100 1,000,000 90%
Alternate Trading Venues
Unlike other global markets with alternate trading venues, Japanese trading venues do not have consistent tick sizes. This has allowed PTS (Proprietary Trading system) markets to use narrower tick sizes (more than 90% smaller compared to TSE) as a way of competing with the primary exchange.
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Phase 2 Tick % Difference Size (¥) From Phase 1
0.1
90%
0.5
50%
0.5
50% -
1 5
-
5
-
10
-
50
-
50
-
100
-
3,000,000
1,000
500
50%
500
-
5,000,000
5,000
500
90%
500
-
10,000,000
10,000
1,000
90%
1,000
-
30,000,000
10,000
5,000
50%
5,000
-
0,000,000
50,000
5,000
90%
5,000
-
Higher prices
100,000
10,000
90%
10,000
-
Source: Credit Suisse Trading Strategy, Tokyo Stock Exchange
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O&A Exhibit 2: Current & New Tick Sizes after Phase 1, 2
Exhibit 3: Current & New Tick Sizes after Phase 1, 2 =
Source: Credit Suisse Trading Strategy, Bloomberg
Ripple Effects
Queue wait time: As explained in Inside the NBBO: Pushing for Wider – and Narrower! - Spreads, wide tick sizes means it costs more to cross the spread and take liquidity. This makes traders more reluctant to pay the spread and encourages them to post resting orders on the near touch instead. With the new narrow tick
Source: Credit Suisse Trading Strategy
the queue sizes. Exhibit 5 shows the current relation between spreads and average touch size in Japan. We believe that the role of algorithms and electronic trading will continue to grow and aggressive liquidity capturing algorithms will become more prevalent with the new market structure.
SPREADS
structure, we expect wait times in queue to reduce significantly.
Signalling and market risk: Reduced queue waiting times should protect quoted orders from being exposed to signalling and market risk, and reduce the ‘information cost’ impact on executions. This will be in addition to the spread cost saved by investors (see A New EDGE in Impact Cost for more on the impact of duration on ‘signalling’ risks and impact cost). Dark pools: Another consequence of narrower tick sizes is the reduced benefit of dark pools. Dark pools often provide midpoint executions, allowing both buyer and seller to capture half of the bid-ask spread. Using our ExPRT data, we find that stocks with wider spreads do trade more in dark pools (Exhibit 4). We cannot completely discount the impact of dark pools in low spread environment. In Getting to Grips with VWAP we show that higher exposure to dark pools reduces slippage versus VWAP. Furthermore, dark pools will continue to provide traders with a means to minimize signalling and market impact, particularly when trading in size. As a result, dark pools will remain an important venue for traders as they seek to outperform one another. Queue sizes: As spreads and queue waiting times reduce, so do Exhibit 4: Stocks with wider spreads have a higher % crossed
Source: Credit Suisse Trading Strategy, Bloomberg
WWW.ASIAETRADING.COM
by Nitin Batra
Credit Suisse Trading Strategy
High Frequency: HFTs thrive in markets with wide spreads and stable bid-offer quotes. This allows low latency strategies by market makers to use price-time priority and make profits by capturing spreads. Such strategies are specifically useful for stocks that trade within a few ticks for the entire day and have large order queues. Smaller tick sizes and shorter order book queues will reduce the opportunity for market making strategies to generate profit, as anyone wanting priority will only need to offer stock inside the latest spread to create a new best offer. Arbitrage Trading: Arbitrageurs make profits when deviation of asset prices is higher than the transaction cost. With lower spreads and lower execution costs, arbitrageurs will able to take profits from lower deviations.
Spreads and Cost of Trading outside Japan
We believe the change of tick sizes will be beneficial to investors by reducing the cost of trading, and will increase TSE’s competitiveness both domestically in Japan and globally. It is important to note that as Japan implements smaller tick sizes, US regulators are discussing to widen spreads. As part of the JOBS act, they are looking at increasing tick sizes for “emerging growth companies” as a way to promote liquidity and encourage IPOs. Exhibit 5: Stocks with wider spreads have a higher % crossed
Source: Credit Suisse Trading Strategy, Bloomberg
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EQUITIES
Takahiro Mitani,
President, Government Pension Investment Fund (GPIF)
By Yasuo Ohchi
S
ome point out that it depends on the Government Pension Investment Fund (GPIF), the world’s largest pension investment fund, as to whether JPX-Nikkei Index 400, whose calculation started in January 6, 2014, is regarded as a benchmark of Japanese economy. Market observers focus on GPIF’s decision to promote investment to the companies which are selected as JPX-Nikkei Index 400. If GPIF starts to invest in them, the other pension funds might follow its lead, which would give the index all of the credibility that it needs to be thought of a new Japanese economic benchmark. Atsushi Saitou, CEO of Japan Exchange Group (JPX), said at the press conference held in Tokyo Stock Exchange, “Offshore investors look forward to this new index very much. I know a lot of problems need to be solved regarding the index, but I understand that people regard the index as positive. I would like many pension funds to invest using JPX-Nikkei Index 400 in the future.”
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They say GPIF holds as much as 120 trillion yen (around US$1.2 trillion) of assets, including 20 trillion yen (around US$200 billion yen) of Japanese equities. Currently, GPIF considers the Tokyo Stock Price Index (TOPIX) as a benchmark of Japanese economy and for investing its pension assets. However, about 70% of the total assets of GPIF are bonds, a balance that is weighted far more towards debt than many other pension funds around the world. Nevertheless, there have been reports that with Japanese government support, GPIF is likely to use JPX Nikkei-Index 400 as a part of its asset management strategy. Within the Japanese stock markets, the predominant mood is to wait-and-see. Some economists and analysts forecast that the Nikkei average will peak at 20,000 yen, but actually the average is just around 15,000 yen, which is not really changing dramatically. “The balance of the investment trusts connected with JPXWWW.ASIAETRADING.COM
EQUITIES Nikkei Index 400 does not increase much beyond around 20 billion yen (US$20 million). Few of the financial institutions executed sales promotion of the investment trust,” an economist says. Makoto Onoda, marketing manager of eWarrant Japan Securities K.K., says, “If I were a sales person of a financial product connected with JPX-Nikkei 400, it would be difficult for me to promote to my customers because it has been only one month and a half since the first release of the new index. I would need more data of the index.” Regarding Japanese economic condition, Onoda says, “I think Mr. Abe (Shinzo Abe, Japan’s Prime Minister) and Mr. Kuroda (Haruhiko Kuroda, Governor of Bank of Japan) struggle (for further growth of Japanese economy). Rather, I think [bearish stock markets result from] overseas factors.” He continues, “Argentina’s peso falls sharply, and there is drought damage in Brazil’s crop fields. Moreover, Thailand is still unstable. China’s shadow banking is a problem to be solved; there is uncertainty about the Chinese economy; emerging economies’ conditions are worsening. Both advanced and emerging economies relate to each other to some degree. So advanced economies could be affected by emerging economies. Though Japan has suffered from no economic shock, people refrain from aggressive investment toward equities because such overseas factors are too uncertain. The stock market has declined since the first session of 2014, and it is not good for Japanese investors’ sentiment.”
JAPANESE STOCKS TO BE BULLISH
However, some of them still have a bullish stance towards the Japanese stock market. In Japan, the consumption tax rate is supposed to be raised in April. At this time, there is a possibility that Bank of Japan might announce additional quantitative easing. In that case, Japan’s financial markets could be triggered once again. Equally, it is possible that people will focus on JPXNikkei Index 400, and more financial institutions would perform sales promotion of exchange-traded funds (ETFs) and other products connected with the new index. Meanwhile, financial institutions want futures of JPX-Nikkei Index 400 to be listed in Japan’s Stock Exchange because they need to WWW.ASIAETRADING.COM
hedge risk by investing in products connected with the index. Onoda says, “I think that speculative investors prefer high volatility of futures market. If futures of JPX-Nikkei Index 400 were listed, which would become more volatile out of the Nikkei 225 futures and JPX-Nikkei Index 400 futures? Nikkei 225 futures are volatile and their trading volume is higher than that of TOPIX futures. How many investors trading Nikkei 225 futures would transfer their positions to the new market?”
WHAT ABOUT ROE?
Components of the JPX-Nikkei Index 400 are included based on their high return on equity (ROE). Onoda says, “I think that it is good for companies to raise ROE as managerial goals. If some of the companies increase ROE, they might compose part of the JPX-Nikkei Index 400 next time. If so, their stocks and values would rise. There is a sign that companies of emerging markets also have a chance to be selected as composites of JPX-Nikkei 400.” However there are also concerns about the way that this measure will affect composition of the index. “ROE tends to increase when business is good, and it tends to decrease when business is bad,” said an economist, speaking on condition of anonymity. “I wonder if investors are able to deal with investment of JPX-Nikkei Index 400 when business is bad. Furthermore, the company whose ROE increases tends to fall, and the company with its falling ROE tends to increase. That is, after the company whose ROE is falling reduces its capital investment and cost base, including labour costs, its stock will often rise. The company with a high ROE tends to get more profit through promoting capital investment and employing its workers, but its stock will fall when business turns bad.” He continues, “Return on asset (ROA) as well as ROE should be considered. If companies neglect their financial bases and borrow a lot of money [from their banks] to make capital investment and expand their businesses, ROE should rise. I have a feeling that something is wrong in the way this new index is calculated.” Onoda forecasts that the way of calculation will be changed in the future. March 2014
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FRAGMENTATION
Highlights Feb 2014 Turnover
Market
Volume billion
Billion USD
Share %
shares
TSE
$611.13
93.27
70.24
SBIJ
$18.13
4.33
Chi-X Japan
$9.19
2.40
Avg Trade
Average Trade
Size USD
Size Shares
39,730,342
$15,382
1,768
2.90
3,731,272
$4,860
778
1.31
1,974,460
$4,656
663
Japan
Trades
Figure: 1
Chi- X JP Nikkei 225 Market Share Value % 5.0 4.5 4.0 3.5 3.0
The story these days is the impact of the Tokyo Stock Exchange Small-Tick Pilot Program (STPP) which saw the PTSs lose one of their key competitive advantages. Though only comprising names within the Topix 100 index, Japan’s biggest companies, the impact to the PTSs can clearly be seen. Chi-X Japan’s February statistics report said that Nikkei 225 market
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2.5 2.0
Nikkei 225 Market Share Value %
1 .5 1 .0 0.5 Mar 1 5 201 3
May 2 201 3
Jun 21 201 3
Aug 9 201 3
Sep 27 201 3
Nov 1 5 201 3
Jan 1 0 201 4
Feb 28 201 4
Source: Chi-X Japan website
WWW.ASIAETRADING.COM
FRAGMENTATION Figure: 2
Figure: 6
TSE Average Trade Size USD
SBIJ Nikkei Market Share Value % 8.00 7.00 6.00 5.00 4.00
Nikkei 225 Market Share Value %
3.00 2.00 1 .00
20000 1 8000 1 6000 1 4000 1 2000 1 0000 8000 6000 4000 2000 0
TSE
Apr 3-04 2013 201
201 3-01 Nov 1 8 201 3
Dec 30 201 3
Feb 1 0 201 4
Source: SBIJ website
7.0 6.0 5.0
Average PI (bps)
3.0 2.0 1 .0
Sep 27 201 3
Nov 22 201 3
Jan 24 201 4
Source: Chi-X Japan website Figure: 4
SBIJ Top Stocks by Market Share
SBIJ Large Cap Average PI (bps) 1 0.00 9.00 8.00 7.00 6.00 5.00
Average PI (bps)
4.00 3.00 2.00 1 .00 Oct 1 4 201 3
Nov 25 201 3
Jan 6 201 4
Feb 1 7 201 4
Source: SBIJ website Figure: 5
7000 6000 5000
Chi-X Japan
3000
SBI Japannext
2000 1 000 0 Apr 2013 Apr-1 3
Jul 2013 Jul-1 3
Oct 2013 Oct-1 3
Jan 2014 Jan-1 4
Symbol 3864 4004 8411 5007 2875 8303 9076 9364 4028 9107
Name Value (JPY) % Primary PI (bps) MTB-PPR 1,162,273,400 27.32 45.00 SHOWDEN 6,018,822,800 15.86 28.94 MIZUHO 102,562,844,220 15.2 21.48 COSMOIL 1,772,378,500 14.29 17.95 TOYOSUI 4,530,264,000 14.26 4.95 SHINSEI 13,919,938,300 14.2 18.56 SEINO-HD 2,252,624,900 13.31 4.54 KAMIGMI 1,308,581,800 12.7 4.63 ISIHRAS 1,128,421,900 12.53 34.25 K-LINE 8,763,577,900 12.37 15.77
ChiX J Top 10 Large Cap Stocks by Market Share
PTS Average Trade Sizes USD
4000
Name Value (JPY) % Primary PI (bps) MIZUHO 102,562,844,220 15.2 21.48 MUFG 60,648,983,940 7.5 5.92 MAZDA 34,140,946,100 5.8 6.84 NSTEELSM 25,943,190,000 9.87 12.59 FASTRET 23,846,182,500 4.93 2.78 RESONA 22,599,159,950 6.37 6.35 HITACHI 23,557,258,300 5.84 3.84 SOFTBNK 28,375,092,300 1.01 1.83 TOSHIBA 20,878,860,600 7.4 8.09 MHI 19,148,126,100 7.45 4.73
Symbol 9531 5401 6861 9532 5020 6273 8308 8411 8309 4188
Name TKO-GAS NSTEELSM KEYENCE OSK-GAS JX SMC RESONA MIZUHO SMTRUST MTBCM HD
% Primary 5.38 5.29 5.09 4.98 4.89 4.68 4.34 4.34 3.89 3.61
PI (bps) 6.6 11.7 1.6 6.9 5.8 1.4 6.4 19.6 6.2 6.9
Source: Thomson Reuters Equity Market Share Reporter
WWW.ASIAETRADING.COM
Source: SBIJ February Statistics Report
4.0
Symbol 8411 8306 7261 5401 9983 8308 6501 9984 6502 7011
Source: SBIJ February Statistics Report
8.0
Jan Jan-12013 3
Jan 4-01 2014 201
SBIJ Top Stocks by Turnover
Chi-X JP Average PI (bps)
0.00 Sep 2 201 3
Oct 201 2013 3-1 0
Figure: 7
Figure: 3
Aug 2 201 3
Jul 2012013 3-07
Source: SBIJ website
Source: SBIJ February Statistics Report
0.00 Oct 7 201 3
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FRAGMENTATION share was 2.1% by value down from 2.5% in January and 2.9% in December (figure 1). Similarly, SBIJ reported 4.3% of Nikkei 225 value in February, 5.1% in January and 5.8% in December (figure 2). Indeed the PTSs are being affected by the tick size change at the primary. Japan’s PTSs generally lose market share in volatile markets as we saw last May 2013 during the Abenomics bubble. This wouldn’t ordinarily make sense as there would be more opportunities to arbitrage between venues but could be explained by wider spreads in the PTSs. Interestingly, however, is the increasing price improvement observed since STPP went live. SBIJ (figure 4) reports data for its large caps and clearly there are better deals to be had amongst that group. Chi-X J (figure 3) reports in aggregate but it too is exhibiting better price improvement over the past few weeks. Market share may have gone down but higher quality executions are being realized on the PTSs. Turning to average trades sizes in terms of dollars we can see a large decline from more than US6,000 in December to US4,656 and US4,859 for Chi-X J and SBIJ respectively (figure 5). Each declining 23.5% since STPP began. The primary’s average trade size shrank too by 12.5% from US16,921 in December to US14,795 (figure 6) in February according to data from Thomson Reuters Equity Marker Share Reporter. Part of the decline in share price value can be attributed to the market trading lower by around 7.7% but it would seem that smart order routers and black box algos are slicing orders smaller to find pricing inefficiencies.
No we don’t think so. We think this market share contraction is only temporary and the industry will need time to absorb the change. There is still value in queue jumping and finding liquidity in illiquid shares and the PTSs are showing better price improvement to the benefit of the industry. But removal of the tick size advantage will push the PTS to keep improving their product, innovating with pricing schemes or order types which are better suited to certain trading outcomes. Look at Australia. Much of the industry has yet to embrace the value of alternative venues and to justify the cost of multi-market access. This is changing. Rakuten securities, one of Japan’s largest retail brokers, has selected Chi-X SOR technology electing to buy rather than build. Last year’s increased volumes saw commissions increase and there is now some money in the brokerage industry to invest and improve product offerings and services eventually spilling over into accessing the PTS. There are some other regulatory considerations that need to be revised as well. In particular, is that margin trading is not allowed within PTSs. This would provide a significant boost to the alternatives particularly with retail and hedge funds. Of course there is the 10% rule which isn’t being approached any time soon but with some further PTS adoption and margin trading that threshold and its consequences would need further regulatory change as well. More remains to be seen however as the first two months of the year have been filled with holidays nor have we seen the impact of increased volatility as we did last May. Japan’s market is maturing and will only continue to improve execution efficiency going forward. The second stage of the Small Tick Pilot Program will commence 22 July.
Is this the end of the PTSs in Japan?
Highlights Feb 2014 Turnover
Market
Volume billion
Billion USD
Share %
shares
ASX
$69.52
87.93
30.67
Chi-X Australia
$7.17
12.07
4.53
Australia
Trades
Avg Trade
Average Trade
Size USD
Size Shares
15,738,487
$4,418
1,949
2,495,235
$2,874
1,815
Figure: 8
Chi-X Aus Market Share % 1 6.00 1 4.00 1 2.00 1 0.00 8.00
Chi-X continues to hold on to its market share (figure 8) in the low teens having lost around 2% from 14.18% at the end of January to just over 12% at the week ending of 21 February. Notional turnover was up more than 28% on the primary to just over US69.52 billion in February compared to the quieter
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6.00 Chi-X Aus Market Share %
4.00 2.00 0.00 Jul 1 2 201 3 Aug 23 201 3 Oct 4 201 3 Nov 1 5 201 3 Dec 27 201 3 Feb 7 201 4
Source: Chi-X Australia website
WWW.ASIAETRADING.COM
FRAGMENTATION
Figure: 9
Price Improvement Chi-X Australia From Jul 2013 50.00 45.00 40.00 35.00 30.00 % Trade PI
25.00
Average PI (bps)
20.00 1 5.00 1 0.00 5.00 0.00 Jul 1 2 201 3
Aug 23 201 3
Oct 4 201 3
Nov 1 5 201 3 Dec 27 201 3
Feb 7 201 4
Source: Chi-X Australia website
Figure: 10
Title: ASX and Chi-X Australia Average Trade Size USD 6000
5000
4000
ASX
3000
holiday month of January but Chi-X realized just over a 15% increase to US7.17 billion from US6.21 billion according to Thomson Reuters Equity Market Share Reporter. It’s not clear why exactly Chi-X lost some market share but we speculate that there must have been an increase in trading volume in smaller cap names which may not trade on Chi-X. While market share may have declined price improvement on Chi-X continues to be very good averaging 27.12bps (figure 9) from Jul 2013 compared to just 2.22bps on Centre Point on ASX. We believe Centre Point PI is based on all trades where Chi-X reports price improvement on trades that have PI and that is approximately 1 in 3. Average trade sizes are calculated using Thomson Reuters Equity Market Share Reporter data which is in USD and doesn’t include ASX auction considerations given its largest percentage of daily value traded. We can see that each venue has seen value increase from the quieter December and January months with ASX’s average trade size at US3,792 per trade and Chi-X at US2,874 (figure 10). Turning to the ASX and the Australian Cash Market Report broker dark pool volume continues to hover around 4 – 5%. No further information is available on the quality of these executions but we expect price improvement has increased but by exactly how much remains a mystery. For the most part the trading share break down across dark block, ASX Lit, Centre Point and the broker pools remains relatively stable. It would seem that Australia has found a balance and is in a market structure equilibrium where under normal circumstances each venue has attracted its normal participation.
Chi-X Aus 2000
1 000
0
Jan 2013 201 3-01
Jun 2013 201 3-06
Nov 2013 201 3-1 1
Feb 2014
Source: Thomson Reuters Equity Market Share Reporter
Figure: 11
Chi-X Australia Top Stocks by Market Share % Symbol MTS PDN TLS FXJ AWC
Share % 30.45 24.84 24.66 23.81 23.14
Value A$ 3,333,557 3,143,735 28,817,148 2,361,744 3,382,667
Avg PI (bps) 20.68 68.79 12.93 34.14 26.62
If we drill down a bit into Centre Point we see that UBS, Deutsche and BAML continue to lead the brokers executing on that venue with just over US3.1 billion in January. Of the top 10 participants, Virtu Financial had the largest PI at 24.5bps on A$461.5 million traded and Instinet continues to be by far the smallest average trade size at A$429. Telstra blocks dominate Centre Point boasting 4 of the top 5 trades with the largest at A$1.62million in January. In total, the telco traded A$402.1 million or 15.3% on Centre Point that month. ASX reported that Centre point made up 6.7% of on-market trading in January worth A$4.5 billion
Chi-X Australia Top Stocks by Value Symbol TLS BHP FMG WBC ANZ
Value A$ 28,817,148 24,910,923 17,610,722 15,191,072 14,922,517
Share % 24.66 12.35 15.47 15.83 15.28
Avg PI (bps) 12.93 2.06 12.39 2.53 2.54
Source: Chi-X Australia website
WWW.ASIAETRADING.COM
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FRAGMENTATION
Decimal pricing programme set to spark a new battle for market share
in Japan
Since the introduction of market competition in Japan, the alternative venues, or Proprietary Trading Systems (PTSs), have managed to gain market share. Both Chi-X Japan and SBI Japannext have at times achieved combined weekly levels of nearly 10% of the Nikkei 225. One of the major factors in their success has been the smaller tick sizes they offer which has attracted considerable trading activity because it allows market participants to trade inside the spread of the primary exchange. Chart 1 shows their relative market shares in the Nikkei 225 over the past 3 years. With Japan Exchange Group’s (JPX) new programme of tick size reduction, which began in January 2014, the market looks set to be transformed once again. Phase I has seen tick sizes for TOPIX 100 constituents reduced. For example, tick size for Toyota - one of the many highly liquid stocks in this index - has been reduced to ¥1, one tenth of its previous level. Phase II, expected to take effect in the middle of this year, will see tick sizes reduced further, bringing JPX’s trading environment closer to that of other global markets. The long-term impact of this strategy remains to be seen, but looking at the data available so far (covering just a few weeks) it would appear that JPX has already begun to claw back market share. Analysis on a selection of 30 randomly-selected TOPIX 100 stocks shows a significant drop in fragmentation, with FFI levels falling from 1.26 to 1.09 (chart 2). JPX’s market share over 7 weeks peaked at 98% in some of these stocks, a level last seen in the early days of the PTSs. Looking at one particular stock, Canon Inc., we can see that the combined market share of the PTSs has halved, from just over 12% in September 2013 to around 6% in January 2014 (chart 3). FFI levels for this stock have also dropped significantly to values very close to 1 (chart 4).
Source: Fidessa
With the harmonisation of tick sizes in Japan effectively removing one of the major differentiating factors between venues, the PTSs may have to look at other means of retaining their competitive advantage. That said, as JPX rolls out its decimal pricing programme some market participants will need to upgrade their trading infrastructure and, in so doing, will be better placed to access liquidity on the alternative venues.
Average FFI for a selection of 30 TOPIX 100 constituents Weekly FFI 1 .35 1 .3 1 .25 1 .2 1 .1 5 1 .1 1 .05 1
Canon Inc. lit value breakdown Jan 2014
Canon Inc. lit value breakdown Sep 2013 Chi-X Japan 4.1 6%
SBI Japannext 8.07%
Chi-X Japan 2.1 9%
SBI Japannext 3.83%
Tokyo 93.98%
Tokyo 87.77%
Canon Inc. Weekly FFI 1 .50 1 .40 1 .30 1 .20 1 .1 0 1 .00
It is still early days, but experience from other regions where tick sizes are standard shows that a number of other factors - fee structure, levels of liquidity or a focus on specific customer types, for example - play a crucial role in market competition.
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WWW.ASIAETRADING.COM
WWW.ASIAETRADING.COM
Jan 2014 (USD)
Source: Thomson Reuters Equity Market Share Reporter
Feb 2014 (USD)
BSE data value data not available for February
Feb 2014 (Shares)
Jan 2014 (Shares)
Jan 2014
EQUITIES
RECAP JAN-FEB 2014
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EQUITIES
Asia Exchange Trades Feb 2014 Total: 310,833,504
* Data in brackets are change from Jan 2014 * BSE data not available
Source: Thomson Reuters Equity Market Share Reporter
Asia Exchange Average Trade Size Feb 2014 (USD)
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WWW.ASIAETRADING.COM
EQUITIES
Liquidity 30.000 25.000
Spread (bps)
20.000 15.000 10.000 5.000 0.000
MSCI Asia Pacific Ex JP
Hang Seng
TaiWan TAIEX
NSE S&P Nifty
S&P/ASX 200
Kospi 200
Straits Time
Market Impact Deutsche Bank Quantitative Products One
30.000 25.000
Impact (bps)
20.000 15.000 10.000 5.000 0.000
Hang Seng
NSE S&P Nifty
Kospi 200
Parent Order Size (%ADV)
Source: Thomson Reuters Equity Market Share Reporter
Value Share Trading Feb 2014 (USD)
* Data in brackets are change from Jan 2014 * BSE data not available
WWW.ASIAETRADING.COM
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POST TRADE
Market operators are consolidating in order to expand post-trade operations by Lynn Strongin Dodds
“Mandatory clearing will be big business because everyone is looking for global efficiencies...” Bill Herder, Executive director, Futures Industry Association, Asia 44
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Having barely digested the $10bn acquisition of the indomitable NYSE Euronext in 2013, the InterContinental Exchange (ICE) went on the prowl again, snapping up the Singapore Mercantile Exchange (SMX) and Clearing Corporation (SMXCC) by the end of last year. The $150m price tag may seem paltry in comparison but it captured the headlines as a significant deal for the region. The reason is that Asia is home to a booming physical commodities market but its futures market is immature and underdeveloped. Equity products dominate and as a result there are not the products necessary to help firms trading in the physical market hedge their risk. Western firms see the most opportunities in Singapore because it is farther along the curve in complying with the G20 recommendations – although it is not a member. The city-state is pushing over-the-counter (OTC) trading onto exchanges and through central clearing while also requiring banks and dealers to report their deals to trade repositories which is similar to the Dodd-Frank Act in the US and the European Market Infrastructure Regulation (Emir). “ICE was the first western exchange to buy an exchange out here,” says Bill Herder, Singapore-based executive director of the Futures Industry Association in Asia. “Its presence has been well received. I am not sure it bought SMX for the exchange or technology but the clearing license that it provides as a registered clearinghouse. It can take a long time to get approval for one from the Monetary Authority of Singapore.” WWW.ASIAETRADING.COM
POST TRADE Claire Miller, director of communications at ICE confirms this view. “The acquisition is part of our strategy to operate exchanges and clearing houses in each major region of the world in which our customers operate. Through the transaction, ICE gains the necessary exchange and clearing house licenses to operate in Singapore as well as access to Singapore based clearing members. Singapore was the most attractive due to its status as the commercial and physical hub for much of Asia’s financial and commodity trading community, including energy trading. “ Miller adds that ICE is not new to the city-state, having had a presence in Singapore for more than a decade. “In recent years we have seen increased participation from Asia in our global energy markets, for example Brent, Gasoil, Fuel Oil, Coal futures, as well as soft commodities and NYSE Liffe interest rate contracts. We already offer more than 40 Asia based energy contracts, including the benchmark Singapore Fuel Oil contract.” The acquisition will strengthen its position. Many US and European exchanges including ICE have several Asia-based end clients that trade on the market through intermediary brokers located in the region. These brokers act as a conduit, funnelling trades from small, often retail Asian brokers, as well as larger fund managers, back to US and European bourses. This is especially common for commodity derivatives exchanges, because the most liquid benchmark contracts trade on western markets. However, many of these end clients want to trade in their local time zone, regulatory regime, and to trade domestically bespoke products. Having established an on the ground infrastructure enables ICE to expand their reach into the region. “Acquiring SMXCC was a logical step,” says Miller. “The acquisition means that ICE has now has an established Asian exchange and clearing infrastructure, and it extends our network of markets and clearing houses in the US, Canada, Brazil, and the UK. and continental Europe to Asia.” ICE may have its work cut out. The SMX, which is the Singapore-based subsidiary of exchange operator Mumbaibased Financial Technologies India Ltd (FTIL) was launched with much fanfare in 2010 as a pan-Asia trading platform for futures trading and clearing in commodities and currencies. FTIL was subsequently investigated by Indian regulators and police over suspected violations of rules on contract durations at its commodities exchange National Spot Exchange (NSEL) which filed for bankruptcy last July. SMX, which mainly trades precious and base metals, was considered to be the jewel in the FTI crown of partly- or wholly-owned subsidiaries but it never seemed to fulfil its potential, according to analysts. It has attracted limited volumes since its inception and while the company does not provide a breakdown of earnings for its units. SMX website shows it had an annual turnover of US$71 billion and average daily volumes of over 8,200 contracts, well below volumes in the group’s domestic exchanges. Analysts have also criticised the poor quality of its technology, while products such as the gold and silver future contracts launched in 2012 were seen as being copycat versions of those already on the marketplace. However, many believe that there is plenty of scope for the US-based exchange to develop new listed contracts. For now, ICE is keeping its cards close to its chest. According to Miller, it is currently in a period of transition in order to WWW.ASIAETRADING.COM
implement technology changes at SMX in consultation with the market and regulator. It expects to re-launch the operations in the second half of 2014 and is evaluating the product and clearing strategy of SMX and SMXCC to ensure the offering meets market participants’ needs in the region. New product opportunities include the potential for a variety of new cleared contracts to serve the Asian commodity and financial derivatives markets. ICE though is not the only exchange to be making waves. Late last year, the European Energy Exchange (EEX) acquired a 52% stake in Cleartrade Exchange, the Singapore-based commodity derivatives bourse. Leipzig-based EEX was formed in 2002 by the merger of two regional German electricity exchanges and nine years later, the derivatives exchange Eurex, owned by Deutsche Boerse and the Swiss Exchange, became the majority shareholder in EEX. EEX’s aim is to offer commodity traders, utilities and financial institutions, a so-called ‘one-stop shop’ in exchange trading and clearing for multiple asset classes across regions. “Our focus so far has been the European energy markets,” says Peter Reitz, EEX chief executive. “We have presence in the US but little footprint in Asia. We decided to do the deal because we have complementary asset classes with EEX focusing on power, gas, emissions and coal while Cleartrade trades freight, iron ore and steel. Together we will be able to offer ten asset classes. Another benefit is that our clearing subsidiary, European Commodity Clearing (ECC), already clears trades for seven venues including EEX and is also set to provide clearing for transactions on Cleartrade. This means that there will be plenty of opportunities for clients to benefit from netting, cross margining and improved liquidity.” CLTX plans to launch coal futures in the first quarter of this year while liquefied natural gas (LNG) products is also on the agenda but no clear debut date has been set. New emissions regulation in the shipping sector is prompting changes towards using LNG as a fuel because it is cleaner than oil. In addition, the increase in shale gas production is expected to reduce global natural gas prices. Around 70% of global LNG trading is based in Asia, with Japan and South Korea, and increasingly also China and India, acting as the main buyers, with Qatar as well as Australia being the main suppliers. Cleartrade Exchange chief executive Richard Baker adds, “The real issue as the market moves from OTC derivatives towards clearing is to capture efficiencies through the use of portfolio margining. Asia is adopting the reforms of the G20 but countries are at different stages with Singapore being the most closely aligned with Dodd-Frank and EMIR. I am not sure if we will see the creation of brand new clearinghouses but we could see international houses taking both secondary and primary licenses within the region to suit their overall market growth and regulatory objectives.” As with many sectors of the financial services in the region, the fragmented landscape could pose challenges. Herder says, “Mandatory clearing will be big business because everyone is looking for global efficiencies. However, Asia as a region will never become like Europe with a single monetary union with one currency. Each country is different politically and culturally. Singapore and Australia are large markets that appear to be the farthest ahead in terms of meeting G20 recommendations. The opportunities in other regional centres will vary based upon size and accessibility.” March 2014
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TECHNOLOGY
TIME SYNCHRONISATION
BOOSTS HFT. AND TCA TIME STAMPING IS MOVING UP THE AGENDA IN THE
ASIA PACIFIC REGION. ROGER AITKEN EXAMINES THE LANDSCAPE AND CANVASSES INDUSTRY PLAYERS.
T
ime stamping and synchronization quality has become an increasingly important issue for market participants and regulators in recent years. As the latency of hardware and trading infrastructure has reduced to microseconds from milliseconds and automated trading has expanded across asset classes, institutions have become acutely aware of the need to improve the quality of the data that they base their trading decisions on. Inaccurate time stamping on a data feed can impact trading activity for high-frequency trading (HFT) firms, it can affect the accuracy of transaction cost analysis (TCA) and it can obfuscate analysis of market events. TCA has largely been applied to use in the equities world to help improve execution quality and to demonstrate best execution to support regulatory compliance. More recently TCA has been extended to FX, fixed-income and derivatives trading beyond simple best execution reporting to deliver actionable insight. The key to efficient TCA is accurate data including accurate and plentiful time stamping. Time stamps and timing of trades has been used as evidence in disagreements between buy- and sell-side firms. State Street in the US was sued in December 2009 for US$200m in damages by
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California’s state attorney Jerry Brown for allegedly overcharging two of the state’s pension systems by $56m on currency trades between 2001 and 2008. A lack of time stamp data on trades in the bank’s reports was stated by Brown to have been deliberate to prevent accurate analysis of actual costs. In 2012, the Foresight Committee, a group analysing the impact of computer-based trading for the UK government, recommended that, “Legislators and regulators should consider implementing accurate, high resolution, synchronised timestamps because this could act as a key enabling tool for analysis of financial markets.” More recently, Virtu, an HFT electronic market-maker with desks in Singapore, got into a dispute with Nanex, a market data analysis firm, over the latter’s conclusion that Federal Reserve news of tapering had been leaked on 18 September 2013. In a report based upon a separate set of time stamping data to that used by Nanex, Virtu it identified from its own data that the information on tapering had left Washington D.C. ahead of the designated launch time. However it concluded, “when using accurate market data and proper timestamping[sic] (which is supported by the exchange’s WWW.ASIAETRADING.COM
TECHNOLOGY timestamps), there is no evidence of a “leak” of the Fed news regarding tapering.”
STAMPING IN ASIA
Philip York, CEO of hedge fund management firm Alt 224 , says that time-stamping is now growing as an issue in the AsiaPacific region, even if it is not as pronounced an issue as in North America and Europe. Commenting at an electronic trading event in October 2013 in Hong Kong, he flagged up the issue in a panel on challenges to finding liquidity in Asia. York said that one of the challenges facing electronic markets globally is the synchronisation of timing in creating a consolidated feed. He warned that although less than 2% of trading in Asia today is off-exchange and not yet an issue for many Asian markets, growing fragmentation in markets could make it more significant. Australia is a fragmentation success story in the Asia Pacific region. Alternative venue Chi-X Australia claims 12% of the equity market, buy-side only block trading venue Liquidnet has been established since 2008 and broker crossing networks are very active. To co-ordinate these venues, the Australian Securities and Investment Commission (ASIC), the financial regulator, has a requirement for the use of Universal Time Coordinated (Australia) - or UTC (AUS) for short - by all markets. Tim Thurman, ASX’s chief information officer, explains that the exchange time-stamps orders as they arrive at the exchange’s gateway, so it knows exactly when the order enters the exchange either for automatic execution or to be booked in the central limit order book (CLOB). “Orders in the CLOB that execute also have an execution-timestamp, so every step of an order from the gateway to execution to delivery back to our client is time-stamped and measured for latency,” he says. “Based on the UTC requirement all execution venues in Australia should be very close to one another. The ASX has a policy to set its internal clocks continuously throughout the day so we are synchronised all the time. This is performed on all our system software and hardware. I do not see time-stamping and clock synchronisation as an issue if the market becomes more fragmented. As long as the execution venues manage their internal clocks correctly and time-stamping is conducted at the most efficient locations in their systems, there should be no problem.”
Rob Laible
Head of Electronic & Program Trading for Asia, Macquarie
“...in the fragmented securities markets that are interlinked, potential other arbitrage opportunities arise - one of which is‘latency’arbitrage.” WWW.ASIAETRADING.COM
Tim Thurman CIO, ASX
“As long as the execution venues manage their internal clocks correctly and time-stamping is conducted at the most efficient locations in their systems, there should be no problem.”
FALLING THROUGH THE CRACKS However Michael Aitken, CEO and chief scientist at the Capital Markets Cooperative Research Centre in Sydney, notes that while venues “should be close to one another” there is still room for potential error where firms are trading at very small time intervals. He says, “No one that I am aware of is seeking to resolve problems because most people don’t even see the problem. In fact it only really becomes a problem when you start talking trading in milliseconds and microseconds.” For fund managers seeking improved TCA, the ability to measure timestamps accurately is fundamental. For example, if trading on a value-weighted average price VWAP benchmark, two points in time are required which are typically either an event timestamp or market open/market close. Any inconsistency between stamps could create inconsistency between prices that were actually traded at the same time. Fragmented markets are naturally a target for HFT firms for whom synchronisation is crucial. Rob Laible, head of Electronic & Program Trading for Asia at Macquarie in Hong Kong, says, “As soon as there are two or more places to trade a fungible security you introduce the potential opportunity for arbitrage. In the past it has usually been about price and arbitrage has acted to help keep the markets in alignment. However, in the fragmented securities markets that are interlinked, potential other arbitrage opportunities arise - one of which is ‘latency’ arbitrage.” Thurman points out that “In the Australian market, the execution venues never directly interact so time synchronisation between the venues is not an issue.” However the issue may lie with trading firms themselves, rather than the exchanges. If HFT firms, whose trades require execution down to the microsecond, are receiving execution data that is not correctly stamped, it could create serious problems for them. Aitken says, “In respect of ‘on-market’ trading there is only one way to begin to address the problem of time non-synchronicity in orders and trades and that is to have one CLOB in which different liquidity pools are aggregated.” March 2014
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BACK PAGES
EVENTS
39th Annual International Futures Industry Conference
Date: 11 March Where: Boca Raton Type: Conference
FISD Hong Kong Date: 11 March Where: Hong Kong Type: Forum
FISD Singapore Date: 18 March Where: Singapore Type: Forum
FOW Derivatives World Asia Date: 2 - 3 April Where: Hong Kong Type: Conference
TradeTech Europe Date: 8 - 9 April Where: Paris Type: Conference
International Derivatives Expo Date: 10 - 11 June Where: London Type: Conference
China Forex Investment Summit 2014 Date: 19 - 20 June Where: Shanghai Type: Conference 48
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DIRECTORY
BofA Merrill Lynch, recently voted Asia’s Best Brokerage and Asia’s Best Sales in the 2012 Institutional Investor All-Asia 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. Email: 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
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Singapore Exchange (SGX) is the Asian Gateway, connecting investors in search of Asian growth to corporate issuers in search of global capital. SGX represents the premier access point for managing Asian capital and investment exposure, and is Asia’s most international exchange with more than 40% of companies listed on SGX originating outside of Singapore. SGX offers its clients the world’s biggest offshore market for Asian equity futures, centered on Asia’s three largest economies – China, India and Japan. www.sgx.com 2 Shenton Way, #19-00 SGX Centre 1, Singapore 068804 Tel: (65) 6236 8888 Fax: (65) 6533 4310 Email: trade@sgx.com March 2014
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