Asia Etrader

AsiaEtrader Issue 1 | Volume 1

I 2012 January

HeADInG

The Electronic Trading Resource for Asia

Asia Etrading: Year in Review MF Global: The Fallout in Asia

LeADeR

AsiaEtrader Issue 1 | Volume 1

I 2012 January

HEADING

The Electronic Trading Resource for Asia

A new Magazine in the year of the Dragon Chinese mythology holds the legendary dragon as a symbol of power, strength, and good luck with the Emperor often represented by this potent symbol. Not to say that this magazine is of royal decent but rather Asia’s electronic trading

industry

displays

all

the

power and strength from a decade of investment and economic prosperity.

Asia Etrading: Year in Review MF Global: The Fallout in Asia

As with everything, a little good luck helps too. We decided it was time to

CREDITS Chief Editor Stephen Edge support@asiaetrading.com

put together this journal in the hopes of capturing all that is Asia’s electronic trading industry from front office, technology, exchanges, risk, regulations and market data all the way to the

Contributing Writers Dan Barnes dan@icorp.co.uk

back-office with clearing and settlement too. We didn’t want to give you a

Tobias Hekster t.hekster@tpedu.hk

with the Asia Etrader, a true multi-asset account of APACs trading business.

Michael J. Aitken aitken@cmcrc.com

know that to have a career in this trade you have to multi-task, work long hours

photo album or sponsored content disguised as a magazine so we came up We believe a magazine is only as good as the industry it serves. We also and keep one step ahead of the competition. We hope that this quarterly

Cover Design Nadia P. nad3e9@gmail.com

periodical will help you do just that. With this in mind we have introduced a Quick Response (QR) Code where you, the mobile executive, can offer feedback

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to us right away. With your iPhone or Android merely scan that dotted black box in the middle of this page

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

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then give it a try. There is another QR Code in the bottom left hand corner that

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back and a little luck, this year of the Dragon will usher in many decades of

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will take you directly to the magazine’s subscription page. We recommend using that once per year.

With all the power and strength of Asia’s electronic trading industry at our prosperity for all of us.

Kung Hei Fat Choi!

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Stephen J. Edge Wild Wild Web Ltd. GPO Box 11108 Hong Kong

Editor

www.asiaetrading.com ©2012

www.asiaetrading.com z January 2012 z Asia etrader

1

contents

Contents 4

Cover Story:

2011 Electronic Trading in Asia Review

10

Opinion & Analysis:

Has Competition Been Good Or Bad For Australia’s Securities Market?

12

Cover Story:

MF Global: The Fallout in Asia

15

Buy-Side:

Market Making – Nothing Has Really Changed

Shaking Hands

16

Derivatives:

Gold Bugs Swarming in Asia

Asia Futures Trading Recap 2011

Volatility in Asia

24

Exchange Spotlight:

Australian Securities Exchange – A Leopard Can Change His Spots

27

Risk:

Hong Kong Clearing House Risk Management Reforms

30

Who’s Who:

Ravi Apte – Chief Technology Officer of the National Stock Exchange of India

34

Equities:

Asia’s Fragmentation Footprint

Asia Equity Trading Recap 2011

42

Opinion Poll:

What Is The Life Span of An Algo?

What Market Share Will Chi-X Australia Capture in The First 2 Months?

44

Post Trade:

A Clear Opportunity

47

Technology:

India’s Exchange Empanelment

49

Back Page:

Careers

Dates Directory Social Media

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2011 electronic trading in Asia Review

2

011 in Asia’s electronic trading industry saw much transformation, traction and, sadly, tragedy in a year where the region was largely insulated from the Global Financial Crisis (GFC) hangover.

The earthquake and tsunami that wreaked havoc in Japan, the failed merger between Australia and Singapore, Hong Kong’s ongoing exchange platform build-out, the announcement of competition in Korea, India and smart order routing, flood ravaged Thailand and the year culminating in the collapse of MF Global only hints at some of the events that occurred in the most dynamic region of the world. With more than ¾ of the world’s population spread over 1/3 of the globe we only have 3500 words to endeavor to recount the Asia year in review.

January January saw the launch of the Lao Securities Exchange (LSX) with 2 Stocks - Banque pour le Commerce Exterieur Lao (BCEL) and EDL Generation. The exchange uses the single price auction method matching trades at 10:00am and 11:30am. The LSX is a joint venture between the Lao government and Korea Securities Exchange which entered into an MoU September of 2007. There were investments made in exchange surveillance systems at both the Korea Exchange (KRX) and the Philippine Stock Exchange (PSE) The Singapore Exchange (SGX) introduced pre-trade risk controls.

Alternative trading venues saw the demise of AXE ECN, a joint venture between the New Zealand Exchange (NZX) and six investment banks. Chi-east, the Chi-X and SGX nondisplay joint venture, went live in Hong Kong, Japan and Singapore with 5 initial participants.

The China Securities Regulatory Commission (CSRC) issued a draft for Qualified Foreign Institutional Investors (QFII) regarding trading the CSI300 index future. QFIIs are restricted to hedging and by notional amounts traded. The CSRC also approved the joint ventures of JP Morgan Chase & Co and Morgan Stanley with First Capital Securities and Huaxin Securities, respectively. Australia’s regulator, the Australian Securities and Investment Commission (ASIC), improved short selling reporting by forbidding netting of long and short positions

by fund managers across multiple accounts.

Lastly, the Securities and Exchange Board of India (SEBI) allowed India’s exchanges to offer trading in derivatives contracts on 24 global exchanges.

nFebruary The most notable event this month was the maximum fine handed to Deutsche Bank Korea (DBK) of KRW 1 billion (~USD900,000) from the Korea Exchange’s Market Oversight Commission. The trade in question was executed November 11, 2010 ten minutes before the exchange closed on option expiration day. Initially, DBK wrote calls and bought puts underlying the KOSPI200. Then, in the last 10 minutes of trading 199 names of the underlying KOSPI index were sold across 7 trades valued at USD2.2 billion. These large orders then sent the index lower from 254.62 to 247.51 down 7.11 points or 2.79% decreasing the short call premium and increasing the long put premium realizing a gain of around US40 million. As a result, Deutsche Securities Korea was banned from the KRX for a period of 6 months. Deutsche Bank’s Hong Kong and New York branches were also implicated. More from the derivatives space this month witnessed the Bombay Stock Exchange (now BSE Ltd) begin trading single stock futures and options contracts that would deliver the underlying rather than settle in cash.

In Japan, the Osaka Securities Exchange (OSE) launched J-Gate, its derivatives trading system built on NASDAQ OMX technology declaring “the world’s highest order processing capacity”.

On the topic of speed, the OSE’s rival, the Tokyo Stock Exchange (TSE), launched its low latency market data service. The exchange also reduced tick sizes in its equity options in an attempt to boost liquidity and entice high frequency traders. Bursa Malaysia’s new CEO Dato’ Tajuddin Atan was appointed and the ASEAN Trading Link of which Malaysia is a member completed their technology design study. The Hong Kong Exchange began construction on its Tsuen Kwan O-based data center. The mainland’s regulator the CSRC allowed qualified futures firms to run consulting businesses on futures investment and SEBI, India’s regulator, launched its data warehousing and business intelligence system.

“the OSE launched J-Gate, its derivatives trading system built on NASDAQ OMX technology declaring “the world’s highest order processing capacity””

Asia etrader z January 2012 z www.asiaetrading.com

cover story

“The 9.0 magnitude quake generated tsunami waves reaching heights of 40 meters and is believed to have shifted the Earth on its axis by some 10 to 25 cm.” nMarch At 14:46 local time on Friday, 11 March, 2011 Japan experienced its largest ever recorded earthquake off its north-east coast. The 9.0 magnitude quake generated tsunami waves reaching heights of 40 meters and is believed to have shifted the Earth on its axis by some 10 to 25 cm. The following Monday morning, however, Japan’s exchanges were not deterred and opened for business seeing trading volumes double and volatility soar amongst panic selling. What had averted an even greater panic was that all of Japan’s bourses were able to handle the surge in trading and perform without any technical problems. The President and CEO, Atsushi Saito, came under fire from many western firms for not having closed the exchange as foreign companies were evacuating their staff to Hong Kong, Singapore or Australia under the threat of nuclear radiation.

Other news in Asia came out of Thailand where it was busy launching single stock and silver futures. The exchange was also actively engaging securities companies and institutional investors to adopt algorithmic trading. China continued to expand its commodity futures market by approving the listing of both lead and coke futures. The CSRC was not the only Asia regulator with some news this month.

ASIC finally announced a clear timeframe for when competition could commence in Australia and they also presented a consultation on the Market Integrity Rules (MIR) for Chi-X. Western exchange groups were busy in Asia as well with Eurex’s KOSPI option surpassing the 500,000 contract mark in only 7 months. NYSE Euronext and the Tokyo Stock Exchange began exploring connectivity to the former’s SFTI network and the International Securities Exchange announced an agreement with the BSE Ltd to launch derivatives products.

nApril This month saw the end of the proposed $8 billion buy-out of the Australian Securities Exchange (ASX) by the Singapore Exchange (SGX). Australia’s Federal Treasurer, Wayne Swan, rejected the proposed merger whose office can block deals involving foreign ownership. Calling it a “no-brainer”, Mr. Swan was concerned with Australia’s financial industry

suffering at the hands of a regional competitor.

The takeover bid did face other hurdles such as removing the 15 percent ownership cap on the ASX requiring legislative approval. There was also the Singapore government’s 23% nonvoting stake in SGX that would have placed Australia’s national exchange in the hands of a foreign government. Some say this was a lost opportunity for Australia as it would have afforded access to Asia and make the country a regional financial center. Despite this setback for the SGX the bourse opened its colocation data centre with more than 50 market participants as part of its “Reach” program.

Thailand also announced that it is upgrading its matching engine technology in both the equity and derivative segments to cater to algorithmic and latency sensitive trading. In Hong Kong, the Mercantile Exchange finally obtained the go ahead to commence operations after more than 3 years of delays. Also, the Multi Commodity Exchange of India (MCX) filed a Draft Red Herring Prospectus with SEBI so that the bourse may meet the ownership requirements to apply for an equities trading license. Other regulators in Asia were also busy in April last year. The Taiwan Financial Supervisory Commission (TFSC) became a signatory to IOSCO and Masamichi Kono of the Japan Financial Services Authority (FSA) will lead the International Organization of Securities Commissions Technical committee.

The Japan FSA also extended restrictions on short selling. The Monetary Authority of Singapore (MAS) brought in a new Managing Director, Ravi Menon, and made some changes to its Board of Directors.

May May saw the execution of the first trade by ICBC at the Hong Kong Mercantile Exchange (HKMEx) of its 1kg physically delivered gold contract. The exchange has ambitions of being the primary commodity exchange in Asia leveraging its time zone and access to China. Additionally, it is using LCH Clearnet (in London) for its clearing rather than the Hong Kong Exchange’s clearing apparatus pioneering (along with Chi-east) competitive clearing in Asia. The HKEx too had some interesting developments in May as it continues to ramp up its derivatives business by introducing synthetic futures trading in its

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stock options market. A newly created role at the exchange, Chief Administrative Officer, saw Joseph Meyer the ex-CEO of Chi-X Japan appointed. On the topic of Chi-X, the Australian subsidiary finally had its Market License approved. Singapore was also busy in May. The Singapore Mercantile Exchange (SMX) lost their CEO Thomas McMahon who served less than one year amid differences of opinion on the direction the exchange should go. SGX, the cross town rival, saw rubber futures added to its derivatives segment. This product was a hangover from the now defunct Singapore Commodity Exchange (SICOM).

Also, the SGX announced the reduction of tick sizes in order to cut trading costs for the industry and try to fuel high frequency trading at its exchange. Once again, Eurex was active in Asia last May. The BSE’s flagship index the SENSEX 30 began trading on the German bourse, the KOSPI option surpassed another milestone of 1 million contracts doubling volume in only two months and, finally, Eurex launched its access point in Hong Kong. Not to be out done, NYSE Technologies expanded connectivity into China with Shanghai Stock Communications (STOCOM), a wholly owned subsidiary of the Shanghai Stock Exchange, establishing a connection to the NYSE Technologies Marketplace for FIX order routing services.

nJune

eligible ASX-listed or quoted securities executed by any Approved Market Operator to be cleared and settled by ASX Clear and ASX Settlement.

Japan’s competitive landscape continued to evolve too with SBI Japannext accepting order flow from that country’s largest retail broker, SBI Securities. Also, Goldman Sachs upped its stake in the TSE to 2.64% making it the second largest shareholder behind Morgan Stanley with 4.4%. In India, SEBI allowed the National Stock Exchange (NSE) to list S&P 500 and Dow Jones futures. The regulator also allowed for a liquidity enhancement scheme effectively permitting rebating to market makers in the equity derivatives segment. Integration of the FIX Protocol into Taiwan’s exchanges and clearing facilities was completed. Silver futures trading began on the Thailand Futures Exchange and the country’s top regulator SEC Board Chairman Vijit Supinit resigned. The Singapore Exchange continues to improve the quality of its secondary market by opening a consultation on its preopen and pre-close phases. The crux of the proposal is that during the pre-open phase the exchange would publish a real-time Indicative Equilibrium Price (IEP) and the pre-close phase will close at a random time. An interesting equity trade happened between Crédit Agricole and CITIC Securities. The former is selling 19.9% of both CLSA and Crédit Agricole Cheuvreux to the latter. What’s interesting is that CITIC also has a joint venture in China with Newedge a competitor of CLSA.

reaching tabling changes to develop Korea’s investment banks, improve the fund management industry and reform

July

Exchange competition in Australia continued to take form this month when the ASX gave the nod to Chi-X to use the exchange’s clearing and settlement infrastructure known as the Trade Acceptance Service (TAS). TAS went live October 2010 in anticipation of competition under which Chi-X entered into a 5 year agreement agreeing to pay A$275,000 (USD280,000) per annum to use the service. TAS allows trades in CHESS-

“The proposal is far

You would have thought that the first full month of summer would have been quiet but it was far from it. The most interesting news came out of Korea’s Financial Services Commission (FSC) with its announcement to overhaul the country’s financial system. The proposal is far reaching tabling changes to develop Korea’s investment banks, improve the fund management industry for its aging population, reform market structure allowing for exchange and clearing competition, improve capital raising channels for businesses and build on its regulatory policies to prevent regulatory arbitrage and punish those engaged in price manipulation. The reforms are long overdue as Korea’s government has, over the years, put its exporting industry ahead of its capital markets. Further regulatory news in Asia saw Mr. Ashley Alder replace Martin Wheatley as the Head of Hong Kong’s securities regulator and Ms Jane Diplock, the ex-Chairperson of IOSCO Executive Committee joined the Singapore Exchange board. The usually staid post trade space saw the Korea Exchange improve its

market structure allowing for exchange competition.”

Asia etrader z January 2012 z www.asiaetrading.com

cover story

settlement efficiency by moving delivery and payment for settlement securities to T+2.

Hong Kong ,also, brought a T+2 finality to its trade settlement apparatus by having cash and securities delivered on the same day into CCASS, the Central Clearing and Settlement System for the Hong Kong securities market (DCASS is derivatives). The derivatives space was the most active asset class in Asia this month. The CFTC allowed Bursa Malaysia’s futures contracts to begin trading in the US, the Stock Exchange of Thailand implemented new floors and ceilings for warrants, rice futures began trading on the Tokyo Grain Exchange, India’s ACE Commodity Exchange launched guar seed and guar gum futures, the HKMEx launched silver futures, the OSE revised trading hours and signed a strategic partnership with the CME. The CME also, appointed Julien Le Noble as its Head for Asia.

Kupper replaced Robert Elstone as the CEO at the ASX, Sompol Kiatphaibool was re-elected Chairman of the Thai Exchange.

HSBC was in the news again. This time in Hong Kong where it pulled the plug on the launch of its retail dark pool StockMax. Pressure from the government, the local brokerage community and the regulator caused the move. In fact, the HK SFC added a condition to HSBC’s automated trading services license that only allowed for professional investors. Best execution takes a back seat to special interest.

nSeptember

“the TSE and OSE announced merger

nAugust The United States credit rating was downgraded this month and caused volatility to jump right across Asia but it was news from China that dominated August. The CSRC granted QFII quota to BlackRock and Amundi bring the total to 9 firms this year permitted to trade the mainland’s capital markets. The Chinese regulator also upgraded its pilot program for margin trading and short selling opening it up to all domestic brokers. The Renminbi (RMB), China’s currency, took another step toward convertibility. China’s Ministry of Commerce said it will allow foreign investors to make direct investments in China’s securities markets with RMB obtained from overseas. This move strengthens Hong Kong as a center for offshore RMB trading and is intended to increase the circulation of the currency in and out of the country. Initially, the eligible amount was set at 20 Billion Yuan (USD3.2 Billion). There was also an announcement from the Board of Directors of HKEx that an agreement in principle had been entered into with the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) with the objective to establish a joint venture in Hong Kong. The possible cooperation could include the expansion of index and other equity derivative products and the development of new indexes. HSBC China became the first foreign bank to join the Shanghai Futures Exchange (SHFE) and ANZ was given the nod to trade China gold futures. In other news, the Singapore exchange eliminated the lunch break in the middle of its trading day and their much anticipated matching engine, dubbed “the world’s fastest” under its Reach initiative, went live. Elmer Funke

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which isn’t expected to complete by 2013 if the Japanese The end of the summer brought with it further market structure improvements and enhancements in Singapore. First was a consultation paper on derivatives clearing reform. The exchange is seeking opinion on how to limit clearing member’s default liabilities, Clearing Fund use and how they should deal with multiple defaults. The next improvement was with respect to transparency where trading halts could be announced earlier at 8:30 am instead of 9am, more disclosure on product listings and trading suspensions with earlier disclosure of corporate actions. The Stock Exchange of Thailand (SET) was in the news again with an announcement to launch oil futures in their derivatives segment and improve Settrade its online trading platform.

According to the exchange, online trading accounted for 24.5 percent of securities volume and 32.5 percent of derivatives volume. In India, SEBI gave approval to the BSE to launch a small and medium enterprise exchange (SME) providing a much needed source of capital to the sub-continent’s startups. The BSE also began its liquidity enhancement program as it struggles to gain market share from the dominate NSE. Under the program

www.asiaetrading.com z January 2012 z Asia Etrader

regulator and OSE’s shareholders approve it.”

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members are paid for trading and maintaining open interest in the flagship SENSEX30 index. Further international relationships were fostered in September too. Brazil’s BM&F Bovespa and the Shenzhen Stock Exchange signed a MoU and the Eurex KOSPI celebrated its one year anniversary with yet another volume milestone. The NYSE and TSE continue to strengthen bonds, this time with NYSE Liffe’s JGB (Japan Government bond) futures contract. This contract was previously cash settled every day in London but from September 26 the positions became transferable to the Tokyo Stock Exchange making them fully fungible and boosting the Open Interest at the Japanese bourse. After much effort, Bursa Malaysia total derivatives trading hit a 31 year high.

nOctober October was all about competition in Australia with the launch of Chi-X Down Under. However, this was overshadowed by the MF Global bankruptcy and because that announcement fell on the last day of this month look for the highlights in November. The much anticipated, highly political and most exciting thing to come to Australia’s financial industry in a long time was Chi-X Australia’s first trade on October 26. It took more than three years and an overhaul of Australia’s regulatory regime to come about but in the end that market’s structure will never be the same. Competition spurred self examination on the part of the ASX and a complete overhaul where it improved technology, services, lowered fees and enhanced the efficiency of their equity market. It also drove a wave of investment from vendors and brokerages seeking to route orders smartly under the Market Integrity Rules. Chi-X is using the ASX’s CHESS clearing apparatus which the exchange still holds its monopoly on but that could change if LCH Clearnet enters that market. A few days before the launch of their rival, however, the ASX had an outage befall them much to their dismay. The Korea FSC expanded on its capital markets overhaul with details on hedge fund regulation, capital requirements, risk calculations, prime brokerage and funding. India saw the BSE and NSE initiate the cross connect of members to each other’s colocation facilities giving a boost to high frequency trading and best execution. Asia’s derivatives industry continued to grow with new contract listings and new global cooperation.

The BRICS announced an exchange alliance that will see each other’s index derivatives listed amongst the associated exchanges. The CFTC issued a no-action letter to the Taiwan Futures Exchange (TAIFEX), TOCOM amended

give-ups, the SGX cleared its first Asian FX forward, the Zhengzhou Commodity Exchange (ZCE) launched methanol futures and the MCX commenced trading in cotton futures.

November MF Global dominated news all around the world and here in Asia too. While the impact in this region was not on the scale of London or New York the bankruptcy had a profound affect on many clients, staff, vendors and the industry as a whole. It was believed that a buyer for the Asia businesses was all but a done deal but uncertainty about client assets and the complexity of multi-jurisdictional regulations on client money appears to make sales by country more likely. Next was the TSE’s and OSE’s announced merger which isn’t expected to complete by 2013 if the Japanese regulator and OSE’s shareholders approve it. The terms of the deal see OSE shareholders receiving less than they would have liked and could prove to be the undoing of the deal. While this merger is good for Japan’s industry and forces that country’s many regulators to desilo and compel Japan to be competitive again each exchange has spent millions of dollars on different technology and will likely see a large spend in bringing everything on one platform.

Speaking of which, the TSE launched Tdex+ the new LIFFE CONNECT low latency platform for futures this month delivering 5 millisecond order response times. Options had been trading on the matching engine since 2009 and this upgrade brought futures into the fold. In keeping with Asia’s all around exchange technology enhancements the Shenzhen Stock Exchange announced its 5th version matching engine. Expected to be delivered in 2015 the platform will handle 200,000 orders per second.

Exchange competition continues to heat up in Australia with the primary, ASX, launching PureMatch. PureMatch is the exchanges answer for high frequency trading (HFT) clients and, like incumbent Chi-X, introduced a maker taker pricing scheme for trading in this venue.

Chi-X Australia in less than one month managed to capture 2% of market share in the SPI200 names. In OTC, Citi cleared its first Asian trades on LCH.Swapclear and the Korea FSC lifted its ban on short selling.

nDecember The final month of the year included a much needed improvement to Hong Kong’s secondary market with an upgrade of its Automatic Order Matching and Execution System (AMS) to version 3.8 on December 5th.

The matching engine scales to 150,000 orders

per second and proffers average latency of around 2 milliseconds. The upgrade brought with it much needed market data improvements with 10 price levels broadcast every 1 second.

Not the most impressive for the world’s largest bourse by market capitalization (its own share price on the exchange) but the HKEx has made the primary market a priority as a facilitator of fund raising in the last few years. This is changing though with key hires throughout 2011 and its new Tsuen Kwan O data center (the details of its new Tier 4 colocation facility were announced this month too). In Australia, the Trade Acceptance Service at the ASX rejected trades sent from Chi-X, the first such issue amongst the competitors in only five weeks since the latter was launched. And a final note for December was the connectivity agreement between the Tokyo Stock Exchange and NYSE Euronext.

Under the agreement, TSE Arrownet and NYSE SFTI networks will be brought together to launch new services to include access to each other’s matching engines and the dissemination of market data.

Our brief examination of the year in review highlights the scope of transformation underway in Asia and the scope of interconnectedness of our 21st century electronic trading world. While these changes are far reaching, APAC has had the benefit of observing the West to employing best practices and foster its development effectively. The region will continue to enjoy capital inflows as global investors seek higher returns and diversification in less mature market. Local investors too are becoming more sophisticated and demanding higher services further fueling the growth and depth of this region’s electronic trading industry. Traction into 2012 will no doubt continue to transform Asia and build on the progress of the past year but hopefully without the tragedy.

Asia etrader z January 2012 z www.asiaetrading.com

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opinion & analysis

Has Competition Been Good or Bad for Australia’s Securities Market?

W

hen Chi-X opened for business in Australia on October 31 2011, competition was set to change the face of the Australian marketplace. A key question is whether this change, and others contemplated in Consultation Paper 145 from the Australian Securities and Investments Commission (ASIC), will change the Australian market for the better or the worse.

While it is too early to answer this question unequivocally, the key purpose of this article is to outline a framework within which the question can be asked and answered.

Our analysis starts with an appreciation of the core mandate given to ASIC and virtually every other securities regulator in the world today including IOSCO: The reason I am referring to the regulator’s mandate is that they are the party assigned the responsibility by national governments to oversee market design changes.

Their mandate is to ensure that markets and changes thereto pass the dual tests of fairness and efficiency. If this is their core mandate, it stands to reason that ASIC and other regulators need to be able to define and measure fairness and efficiency and look at the two attributes pre and post the introduction of competition. If fairness and efficiency go up in the wake of a particular market design change then the answer is that the change was good for the market.

If one attribute goes up and the other remains constant then I still believe the answer is positive.

If however, one attribute goes up while the other goes down the answer is not so clear cut and the change should be rejected or amended.

To begin to address the regulatory mandate we need to start with definitions of fairness and efficiency. I define an efficient market as one in which it is cheap to trade and one in which the price reflects all available information.

The cheaper, the more efficient the market.

The quicker the information is impounded in prices, the more efficient the market becomes.

Following from this definition, one needs to measure the cost of trading and the speed with which information is impounded in prices.

If it gets cheaper to trade after the introduction of competition and information is more quickly impounded in prices, then I would argue that competition had a positive impact on the efficiency of the market. If it increased one but left the other unchanged, I would argue that we are still better off. If one goes up and the other goes down as a result of competition, I would

Table 1 Market Efficiency – Transactions Costs Q3 2010 to Q3 2011 Market’s Region

Average Basis Points

Average Rank

Aug On-Mkt Vol Per Trade

Aug On-Mkt Val Per Trade

America

5.2569

1

337

$10,104

America

5.8148

2

230

$5,745

Chi-X (London)

6.3435

3

1014

$6,861

Europe

7.0411

4

739

$21,593

Europe

7.1846

5

381

$10,595

Europe

9.2938

6

1929

$10,951

America

9.9771

7

496

$6,853

Asia Pacific Middle East

10.8636

8

5392

$12,729

Europe

11.2487

9

1120

$10,726

Asia Pacific Middle East

11.3593

10

1707

$2,906

Europe

13.537

11

2405

$12,880

Asia Pacific Middle East

14.3026

12

355

$883

Asia Pacific Middle East

18.2165

13

2455

$20,824

Australian Securities Exchange 23.6333

14

3922

$7,659

argue that the change hasn’t had the necessary impact on efficiency to pass the regulator’s test of enhancing efficiency.

While we can look to the impact of the same type of change in other markets (such as the introduction of Chi-X in London) the results there are not a perfect indication of the likely changes in Australia as the London market is the net result of hundreds, perhaps thousands of previous market design changes, all of which could lead to a different outcome when they interact with competition. In point of fact, the results from London suggest that Chi-X should both reduce transaction costs and make price discovery more efficient.

I define fairness (hereafter used interchangeably with integrity) as the extent to which market participants engage in prohibited trading behaviours. These prohibitions are defined in law, just like the regulator’s mandate, and most laws enshrine three types: insider trading, market manipulation and broker-client conflict (such as front-running).

None of these are directly measureable but we can use proxies to estimate them. I am not alone in arguing that information leakage is a good estimate of insider trading. It is unusual price and volume behaviour prior to a market sensitive news announcement, and is an

upper limit for insider trading because not all information leakage is illegal. One needs to distinguish between expected and unexpected news announcements (e.g., between earnings and takeover announcements) with the later more likely to reflect insider trading.

After the introduction of competition, if metrics that represent insider trading, market manipulation and broker-client conflict go down or at least stay constant, then one might argue that the introduction of competition had not had a negative impact on market integrity. With a positive change to efficiency and no change to integrity, I would argue that the change has been good for the market. The problem arises if one of either Integrity or efficiency goes up and the other goes down. How might that happen? Again, we can look to London for salutary lessons. It was reasonably clear from the evidence that was supplied by academics in the wake of the introduction of Chi-X that efficiency went up.

While no evidence was supplied in respect of integrity, one might reasonably hypothesise that integrity would go down because there was no centralised surveillance authority established in Europe prior to the introduction of competition.

This meant that parties that previously had to trade in one market could now split their orders across multiple markets. Insider

Asia Etrader z January 2012 z www.asiaetrading.com

opinion & analysis

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Table 2

Table 3

Insider Trading – Estimated Cumulative Abnormal Profit (USD)

Insider Trading – Estimated Cumulative Abnormal Profit % of Total On-Market Turnover

Q3 2010 to Q3 2011 Market Name

Average Dollar Value

Average Rank

Q3 2010 to Q3 2011 Market Name

Average Average Percent Rank

Asia Pacific Middle East

$192,033

1

Europe

0.01%

1

Europe

$4,114,586

2

Europe

$21,333,885

3

Europe

0.01%

2

Europe

$23,331,041

4

Chi-X (London)

0.01%

3

Chi-X (London)

$23,746,010

5

Europe

0.02%

4

Europe

$23,973,035

6

Europe

0.02%

5

Asia Pacific Middle East

$36,539,758

7

Europe

0.02%

6

Asia Pacific Middle East

$36,780,068

8

Asia Pacific Middle East

0.02%

7

Asia Pacific Middle East

$38,253,909

9

Europe

$47,716,388

10

America

0.02%

8

Europe

$63,404,128

11

America

0.04%

9

Asia Pacific Middle East

$86,438,805

12

Asia Pacific Middle East

0.04%

10

America

$123,375,460

13

America

0.05%

11

Australian Securities Exchange

$147,034,297

14

Australian Securities Exchange

0.05%

12

trading is a game of “use it or lose it”. The new market design made it easier to take smaller positions across different markets and harder to detect without centralized surveillance. It was now also possible to manipulate prices in one market in order to trade in another, and with no oversight of the multiple markets one might conclude that we gave up integrity for greater efficiency. This seems to me a sub-optimal position and unfortunately, it still describes the situation today.

Back to Australian competition. How might we know whether competition has been good for Australia (or any other marketplace) or bad?

Or for that matter, high frequency trading, dark pools, short sale bans, circuit breakers or any other market design change? The answer is that we need to measure the proxies for efficiency (transaction costs and price discovery) and integrity (insider trading, market manipulation and broker-client conflict) pre and post the

relevant market design change, leaving enough time for the change to take effect, probably 3 months.

The Capital Markets Cooperative Research Centre (CMCRC) has spent 10 years and A$40 million putting together the infrastructure necessary to measure the relevant metrics for all markets in the world over the last decade. Table 1 (on efficiency) and Table 2 (on integrity) provide an indication of where Australia sits among the world’s exchanges using one proxy for efficiency (transaction costs) and one for integrity (insider trading). These tables show Australia is currently ranked 14th in the world on efficiency and 12th on integrity with numerical estimates of each.

On efficiency, at 14 (approximately 24 basis points), Australia is 4 times less efficient that the most efficient market in the world. It is 8 times less fair than the fairest market in the world with insider trading estimated at US$147 million (or approximately 5/100ths of 1%) per quarter in

Australia. As an aside, note the value of insider trading as a % of turnover in the Australian and other markets in table 3. At just under 5/100ths of 1% (and less for other markets) I suggest that this does not fit with folklore about the extent of insider trading. This is s another reason why more objective evidence on such issues is urgently needed.

Has competition been good or bad for Australia’s securities market? We’ll take a first pass at answering the question with these metrics and how they change in the wake of the introduction of competition. We would want to see both efficiency and integrity improve, or one go down without affecting the other. Watch this space for the results.

See http://www.asic.gov.au/asic/pdflib.nsf/

1

LookupByFileName/cp-145.pdf/$file/cp-145.pdf. This is the consultation paper on Australian Equity Market Structure released by ASIC in November of 2010 in response to the introduction of competition.

Mike Aitken, Chief Scientist – Capital Markets Co-operative Research Centre in Sydney Michael Aitken is widely regarded as the most industry-centric academic associated with Australian capital markets. As the founder and former CEO of SIRCA (www.sirca.org.au), he has used his industry affiliations to build and share infrastructure which now underwrites the research activities of 30+ universities across Asia-Pacific. Working through SMARTS Group (www.smartsgroup.com), he has designed the world’s first “off-the-shelf” surveillance software now in use at 40 national exchanges and regulators (including the London Stock Exchange, NYSE-Euronext, Nasdaq-OMX, HK Exchanges, the Swiss Exchange and the Australian Securities Exchange) and 150 brokers across 30 countries. He leads the research initiatives of the CMCRC which currently includes providing fully outsourced surveillance services to the securities industry as well as outsourced surveillance technology to the health insurance and general insurance sectors.

www.asiaetrading.com z January 2012 z Asia Etrader

12

coVeR stoRy

MF Global: the Fallout in Asia

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he sad an unexpected demise of MF Global (MFG) left many unsuspecting people out of work and even more of their customers holding the bag. John Corizine’s bet with other people’s money further stained the reputation of derivatives trading which has been subject to a litany of legislation and something of a witch-hunt within the industry. The US and London saw the greatest impact to the complications of the fallout but because of clearing arrangements the bankruptcy reached the other side of the world in Asia where MF Global had several offices.

Ironically, MF Global’s entrance into Asia was brought about by another bankrupt firm, Refco, who had US$430 million in bad debts that was also being secured with client funds. Man Financial, as the company was known then, bought Refco in November 2005 for US$282million which had operations

14%

in Singapore, Sydney and Mumbai. The company then expanded to Hong Kong, Shanghai, Taipei and Tokyo forming wholly own subsidiaries or entering into joint ventures achieving some 14% of the company’s global revenue.

KPMG, as the appointed liquidator, indicated early on that as many as 50 bidders had come forth to buy the entire Asia operation.

As it turned out, the web of clearing houses, banks and exchanges holding client and firm cash across the many global jurisdictions discouraged many bidders seeing these operations go under or sold separately.

Singapore As part of the old Refco business, Singapore (MFGS) had the biggest operation in Asia which employed around 90 staff of the 2,894 MFG had globally. MFGS was the regional technology hub as well as the primary FX trading desk and offered a growing contracts-

The amount of revenue Asia accounted for at MF Global

“MF Global’s entrance into Asia was brought about by another bankrupt firm, Refco.” for-difference (CFD) business besides its listed derivatives trading operations.

Interestingly, FX and CFDs are OTC products that offer gearing and tend to attract the retail investor. All trades in these instruments were, in fact, closed out as early as November 1 for FX and November 9 for CFDs. However, by early December no statement of settlement for the amounts had been provided for the closed out FX positions. MF Global Australia (MFGA) acted as counterparty to MFGS CFD trades (see MFGA CFD below) and is awaiting a disbursement from Deutsch Bank.

MFGS was shut down rather than purchased as more than 80 staff were let go November 30.

Under Singapore’s Securities and Futures Act every member who holds a Capital Market Services license is bound to segregate client money from the members own capital and recovery of those assets appears to be going

Asia etrader z January 2012 z www.asiaetrading.com

coVeR stoRy

250

13

“In effect, the Australian Securities and

The estimated number of people who lost their job with MF Global in Asia

Investments Commission (ASIC) has consented

favorably. As of early December, KPMG, had recovered US$332 million of US$473 million of client segregated funds. The Singapore Exchange returned US$42 million and began moving client positions to other clearing members in early November completing the transfer of margins by the 25th. The remaining funds will prove troublesome for CFD trades and those MFGS positions that were held on ICE Clear US, NYSE Liffe US, and the Kansas City Board of Trade. MF Global Inc. (MFGI) acted as the counterparty to that business and despite a United States bankruptcy court allowing 60% of balances in cash only accounts to be returned to its customers, MFGS, like all other MF Asia entities were unable to receive any of those funds. Not until MFGI reconciles all of its trades and accounts will the US trustee return any money. Similarly, the Bank of New York Mellon Clearing clears MFGS trades facing the CME held another US$62 million.

Deutsche Bank with close to A$48 million was the largest. Deutsche bank was the custodian for the MFGA CFD business. The ASX was the second largest counterparty with A$34 million in funds. Clients are not expected to receive their money until Deloitte, the joint administrator, receives all money claimed from its counterparties which could take more than 3 months. However, clients may not, in fact, receive all their money back as there is a loophole in the local regulations under Regulatory Guide 212 issued July 2010. The crux of the policy is that firms are not allowed to use client funds to trade in the house account but are permitted to hedge OTC derivative positions. In effect, the Australian Securities and Investments Commission (ASIC) has consented to the hedging of Mr. Corizine’s position leaving investors no recourse for claims. In the end the Administrator folded the business on November 18 after no buyer could be found.

Australia

Hong Kong

Next was Australia with around 85 staff and nearly 13,000 clients. MFGA was the largest broker in Australian grain futures as well as having an active CFD business (2nd only to the UK). After the news broke about the bankruptcy, ASX 24, the Australian Securities Exchange derivatives platform, suspended trading in wool and grains. MF Global UK (MFGUK) as a Clearing Participant had such a large open interest that the exchange was forced to close those markets in order to assess its exposure after they had been declared in default. Additionally, 14 Trading Member firms were suspended, including TransMarket, GETCO and Epoch Capital, as MFGUK was acting as their sole clearer.

As of early December, counterparties owed MF Global Australia A$167 million (US$169 million), just slightly more than half the A$313 million of client funds of which

MF Global Hong Kong (MFGHK) was granted a license to commence operations in August 2005. This office grew to around 50 staff but failed to secure any buyers in its final days. As of December 2, client funds amounting to nearly HK$1 billion or 80% of the total had been repatriated back to the administrator, KPMG. Client positions

1500

to the hedging of Mr. Corizine’s position” had been sold out on global exchanges as early as November 8 with deadlines for transfer instructions exacted no later than November 11. However, reconciliation of trades and positions was slowed by poor data and information on statements, confirmations and prices. The remaining funds were also held with various MF entities and, fortunately, hadn’t reported any deficiency in segregated funds but also their respective administrators hadn’t shed any light on when the funds would be returned. Hong Kong’s Derivatives Clearing and Settlement System (DCASS) also held segregated funds for MFGHK. In an effort to expedite the return of some of the client capital the liquidator had requested permission from the failed entity’s clients to pursue an interim payout of HK$500 million from the court which was granted December 14. The exposure to MFGI was only US$9 million and it is not clear if these funds will ever be returned but KPMG was optimistic that Hong Kong clients would receive at least 90% of their money back.

The estimated number of screens Patsystems had with MF Global in Asia

www.asiaetrading.com z January 2012 z Asia etrader

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coVeR stoRy

1 Billion

The amount of client funds in USD held in Hong Kong, Singapore & Australia

Taiwan Polaris MF Futures (PMFG) went public in 2007 to become the dominate futures broker in Taiwan. MF Global owned just 19.5 percent of the company that would have seen its share drop to 11.02 percent this April when Yuanta Futures is merged. PMFG had not made any reciprocal investment in the failed company and is largely insulated from any exposure to the bankruptcy. According to the bankruptcy filing MFGI has to find a buyer for its stake in PMFG. MFGI’s rights as a shareholder in PMFG have been suspended. However, a branch office in Taiwan that fell under the Singapore entity was closed. PMFG has 102 partners and sales outlets in Taiwan and as recently as November was granted permission to open a subsidiary in Hong Kong.

India In another joint venture, MF Global Sify Securities India Private Limited, MF Global Holdings sold its 70% stake to an as yet unnamed foreign broker. Because of currency and regulatory restrictions no client money made its way out of the country. Like Taiwan, its equity stake must also be sold down.

At the time of this writing approval from SEBI and the Forward Markets Commission was pending the acquisition. There are currently 370 employees with the company across India. In what can only be described as Déjà vu, Sify securities was rescued from Refco in November 2005 by MFG. With its new majority owner perhaps the third time will be a charm.

Japan The Japan FSA ordered an immediate action on MF Global FXA Securities November 1 that assets must be held in Japan to protect customers. Also, on that day the firm was only accepting closing orders in what is largely a retail FX business and has very little exposure to the rest of MF Global. On November 2 the TSE halted trading in the firm as it was neither a clearing member nor had a clearer. The OSE had only approved its Clearing member status from March 1, 2011 but brought no action to the company. The firm was established

August, 2000 and has 53 employees with over 23,000 accounts.

“Clients are not creditors

China

for brokerages but rather

MFG’s operation in China was a representative office based in Shanghai held through MFGS had just opened in April 2011. Only select foreign futures brokers have been granted permission by the CSRC to operate in China and MFG wasn’t one of them.

Imagine the repercussions from the CSRC if they had. The only real impact comes from Chinese investors trading the LME and US markets through mainland brokers with Hong Kong branches.

These customers will be in the same boat as any other account trading these markets.

Early on there was talk of BOC International (China) Ltd. buying the assets of MFG but that never materialized.

More Victims There was further impact to the industry in the form of technology and to the vendors that sold it. MF Global was Patsystems largest customer and, as a publicly listed company, was required to report its hardships.

MFG not only owed them money but the ISV was expecting recurring revenue from its software sales. It’s not likely they will get all of their money back but MFG clients who transferred will most probably keep using Pats trading technology. It is estimated that Pats had around 1500 screens in Asia.

The rub is that a number of those clients have funds frozen at MFG preventing them from trading anyway. The share price of Pats took a hit on the LSE and ION, there largest shareholder, seeing an opportunity, has proposed to take over the company. At the time of writing the outcome of the offer was unknown. Other vendors that suffered (though much less) from the bankruptcy were SunGard, CQG, Trading Technologies, RTS and ULLink.

Lessons learned At the end of the day it was that client’s segregated funds, the cornerstone of the brokerage business, failed to be set aside

brokers are trustees on behalf of their clients.” and protected. Clients are not creditors for brokerages but rather brokers are trustees on behalf of their clients. The rules of segregation will undergo thorough regulatory examination with the end result that these assets will be held to higher standards of safekeeping. Perhaps client money being held on deposit at an exchange or at arms length with a depository might be the result.

The ability for the broker to access these funds must be eliminated entirely but it will come at a cost to the industry. Clearer regulations on the use of client money can expect to be written in cases like Australia were the use of the funds was deemed reasonable to the regulator.

Of course, these policies should not be made on a reactive or political basis but under further consultation with the industry. Execution brokers and trading firms will likely move to a multi-clearer model to avoid trading suspensions in the rare case their one and only clearer files for bankruptcy.

Unfortunately, this will lead to capital inefficiency as firms will want to margin based on their total position held across all firms. That won’t happen.

The sacrosanct covenant bound in segregated funds was grossly violated. The actions of one man who brought down a viable and profitable firm caused a tsunami of problems wiping out wealth, jobs, livelihoods and further damaged the reputation of derivatives trading still reeling from the Global Financial Crisis hangover.

While the impact to Asia was small compared to the west the ripple effect of the MF Global bankruptcy is bound to change the industry forever.

Asia etrader z January 2012 z www.asiaetrading.com

buy-side

15

Market Making – Nothing Has Really Changed

B

uy ‘m, sold and let me out”. Quite a lot has changed in the past 15 years as most global markets have migrated from a pit trading environment to electronic trading. (and indeed, it is somewhat embarrassing that the S&P 500 contracts in the Windy City are the exception to the rule).

From the perspective of nostalgia, it is fun to recall the social dynamics of pit trading and the repercussions that it had on pricing and liquidity. While the execution method of options trading has changed beyond recognition, there are still many similarities in the trading itself. Yes, we’ve added better dividend modeling, do not have to hand-pick our skews anymore and now have weekly and daily option series to feast on. But most of the key aspects of Market Making are just as relevant now as they were in prehistoric times. Let’s review a couple of age-old concepts that still hold in today’s ultra low latent, hyper-competitive world.

“

Trade and Adjust In the past, color-coded order tickets would reveal the trend in your position building to all but the color-blind. If your runner was slow and your spot in the crowd valuable it could potentially result in prematurely consuming all of your required tickets motivating market makers to save a few tickets for those really outstanding trades. Alternatively, those unused ticket-types that were burning a hole in your trading jacket, begging to be used, tempted you to succumb more easily to an opposite sided trade. Thus, instantaneous position adjustment was born out of convenience.

If we fast-forward to today’s markets, the trader that adjusts his or her parameters too slowly has become the digital garbage can of the market. The concept of a theoretical price only works if one can trade around it on both sides, regardless of the number of quants one has applied to generate this theoretical price. The key is, of course, to define the relevant sensitivities between options, maturities and even instruments to apply your adjustment scheme.

One additional thought to consider as a market maker is the idea behind such a position: while the Market Maker provides unbiased liquidity, the counterparty is willing to cross the bid/ask spread for a reason. Therefore, it is likely

she has thought about why she wants to do this specific trade. On a market level, this places the market maker at the opposite side of market consensus. Consider the definition of ‘toxic order flow’ relating to the May 6th 2010 flash crash. The toxicity lay in the fact that retail and institutional market participants (considered end-users) were interested to exit the market based on their ideas and expectations with all acting accordingly. What was forgotten is that on May 6th we actually saw the streets of Athens burning for the first time in recent memory.

“Most of the key aspects

Mean reversion is your friend, until it isn’t!

Beware of ambushes

Usually, when a trader adjusts too slowly, in most discussions with risk management or other stakeholders, that nicest of phenomena, mean reversion will pop-up. Just as ‘what goes up, must come down’ the position (or more detailed, parameters) that just went against you will revert back to more normal values if you just give it some time. Looking at the markets, this mostly holds. The best crises are of the one-day type, where the next day, or even the t+1 session already allows to profitably trade out of the position. But as soon as it does not (and it need not require an act of God such as an earthquake cum tsunami; a streak of bad news about Europe works just as well) all ‘mean reversionists’ head for the same exit and thus get an expensive lesson on the concept of liquidity. This brings us to the relationship between expected mean reversion and the level of adjusted aggressiveness. Adjusting more aggressively after each trade eats into your profit margin tempting one to let mean reversion do the work instead. Therefore, increased aggressiveness when adjusting serves as an insurance policy against mean reversion not materializing. And it does pay off handsomely if you have a relatively clean sheet to ‘help’ the competition out of their predicament….at a price. An interesting irony is that a liquidity generated spike has the best chances of mean reversion. An unbiased liquidity provision is what sets the market maker apart from the volatility arbitrageur. It is the degree of adjustment that defines whether the market maker is implicitly prepared to disagree with the volatility arbitrageur and thus retain the opposing position.

www.asiaetrading.com z January 2012 z Asia Etrader

of Market Making are just as relevant now as they were in prehistoric times”

In the pit, there was always one trader who would just look at one stale position in the book and wait until the price was right to hit or lift that order.

While not the most constructive of traders, this has since grown into an art form. In the whole ‘HFT is evil’ discussion, this aspect frequently pops up, but in the end it is for the exchanges to solve: what privileges and protection should the market maker receive and what obligations should stand in return. It is worthwhile to note that most market makers actually act as both ‘ambushor’ and ‘ambushee’

Do your homework And finally, what held true in the past still does: as long as components of options pricing are discrete corporate actions such as dividends and as long as company altering events such as profit warnings and take-overs can occur, a purely quantitative trading mechanism is bound to incur slippage in performance because of such factors. And while the duration of mispricings relating to dividends, rights-issues or rule changes has vastly decreased, it still pays to read issuing documents and other awful disclosure material, or better still, have a junior trainee do it.

While to most market makers, perhaps, we have stated the obvious in this column but in the world of constant and increasing technological change old school rules still apply. In pit trading you always wanted to be closest to the market or have the fastest runner or hire the tallest trader who could see all the action. For modern electronic trading nothing has really changed.

By Tobias Hekster

16

buy-side

Shaking Hands With markets being both dry and volatile over the last 12 months, received wisdom says that buy-side firms should have decreased algorithm trading in favour of ‘high touch’ trading. Not for everyone, writes Dan Barnes.

T

his year has seen some tough conditions. Market turnover for Asia in March, following the terrible earthquake and tsunami in Japan, was at a year high of US$2.2 trillion according to Thomson Reuters Equity Market Share Reporter; in October as concerns over Europe’s debt crisis peaked, it had fallen to a year low of US$1.19 trillion, an US$800 billion drop year-on-year for the month.

“The illiquid nature of markets in the region this year has led to increased volatility,” says George Molina, head of Asian trading at asset manager Franklin Templeton Investments.

“One thing that has become obvious to me is that Asia has not decoupled, which was the talk a few years ago. We are one big global market.”

In early September, Asia Etrading ran a poll to find out what effect this year’s tough market conditions were having on algorithmic trading.

As some sell-side algorithms, such as VWAP, use historical data to determine how they should slice their orders, buy-side traders are often cautious about their use when markets are choppy.

Perhaps surprisingly almost a third of respondents to the poll (28.5%) said that their sell-side algos were holding up well. A lack of confidence in technology affected 21.4% who had stopped algorithmic trading entirely and 14.29% had opted for higher touch methods of trading. Over one third (35.6%) were either using different algos outside of the usual, or alternative trading venues.

“When markets are volatile, buy-side traders tend to work more often with a sales trader and have them hold their hand,” says Molina. “The way I see it, some buy-side firms are outsourcing the responsibility of trading; I wouldn’t agree that if markets are volatile you should give your orders to high touch sales traders – only when you believe you’ll get the best price and liquidity.”

Yang Xia, head of Asia Pacific direct execution services at broker UBS, says that his business in

the region has had strong growth year-to-date, although towards the end of the year he admits things had slowed down a little.

“Although the market is getting harder to trade, the service level at the top three to four brokers is increasing,” he says. “The buy-side guys have got more confident as a result, while the algos themselves have been adapted to the market in Asia, so everything is improving for electronic trading.”

Year-on-year, for combined markets in the region he estimates that the broker has traded around 10% more volume.

“The distribution is different market to market,” he says. “Japan and Australia had slightly less volume than last year but Hong Kong and South East Asia have had more. The volatility does make the market more difficult to trade; there are two camps amongst our clients telling us two very different stories of how they want to react.”

UBS has found that the buy-side tend to bifurcate into one set, the high-touch players, who want to preserve their commission pool and pay using the traditional way of trading, through the desk. The other set want to take more control of their trading when the market goes quiet.

“They want to trade more self-directed algorithms and direct market access (DMA),” Xia says. “They are not just the more technology savvy hedge funds that you might expect; there are large asset managers, household names.”

“When markets are volatile, buy-side traders tend to work more often with a sales trader and have them hold their hand”

Taking control Buy-side firm AllianceBernstein has a quant team in New York that develop the firm’s algorithmic trading systems, providing their calibration and analysis. The recent low liquidity levels and increased volatility have required them to do a lot more analysis on the underlying algorithms than in previous years, to make sure they will work in the current conditions and provide a high level of post trade analysis.

“We’ve used sales traders a little bit more but not significantly,” says Emma Quinn, head of Asia Etrader z January 2012 z www.asiaetrading.com

Buy-sIDe

George Molina

Head of Asian Trading Franklin Templeton Investments

Yang Xia

17

Emma Quinn

”The way I see it, some buy-side

Head of Asia Pacific Direct Execution Services UBS

firms are outsourcing the responsibility

“Our liquidity aggregation algo makes up

do more analysis to make sure our strategies

of trading...”

around 35% of our flow on the electronic side.”

are correct.”

Asia Pacific trading at AllianceBernstein. “We’re using different types of algorithmic strategies first to cater for the volatility.

A simple algo might use a 30-day history, with a skew towards the most recent days when considering deciding how run an order, but Quinn says that attempting to use the wrong algorithm on choppy markets carries risks.

“Running an algorithm over the day that doesn’t take into account price movement is dangerous,” she says. “We use custom algorithms that will take a decision to trade at a certain point, that are aggressive so we are not spreading things over the day and getting caught up in momentum trades.”

The firm provides pre-trade cost estimates for all of its trades so that each trader can check their progress against a benchmark, which takes into account market volatility and the cost of doing that trade. Fills are fed back live via FIX, with an analysis run the day after.

“The low levels of liquidity are driving us to do more analysis to make sure our strategies are correct,” Quinn notes. “Volume does impact you, so you have to keep a closer eye on the algorithms to get the desired outcome, watching how orders are trading on a live basis.”

Technology has also played a key role in Franklin Templeton’s strategy in finding liquidity.

“Asia is starting to see more dark pools popping up and you want to have the technology to tap into them,” says Molina.

Although he observes they provide a small percentage of volume compared to the US and Europe, he estimates somewhere between 4-6% of most markets trade off the exchange in dark pools, although in Japan it gets as high as 10% and Chi-X Australia, which launched in October is taking 2% from the incumbent market. Molina has worked with agency-broker Instinet, to develop the Nighthawk algorithm, to provide his team with a liquidity seeking tool.

“It allows me to book one ticket out but to sweep over 15-16 dark pools that are in the market, specifically for Hong Kong,” he says. “One added benefit is that our peers are participating in that dark pool as well so at Franklin Templeton, we are matching larger blocks from our peers flow who would be hesitant about trading in the lit markets for that size.”

Xia notes that UBS sees liquidity aggregation algos used a lot more often in developed markets.

“Our liquidity aggregation algo makes up around 35% of our flow on the electronic side in Australia, Hong Kong and Japan, where VWAP has gone down to about 50%,” he says.

Not all asset managers are happy about using dark pools to find liquidity. Concern about high frequency trading (HFT) firms trying to game orders still abounds, and the recent revelation that block-trading crossing network, Pipeline, had been using a proprietary automated trading shop to match trades for client orders has not settled any qualms.

“I think the situation with Pipeline has unfortunately scared some firms away from participating in dark pools and questioned the type of flow participating in them,” agrees Molina. “At Franklin Templeton, we are of the mindset that there is a price for liquidity and some of the HFT that’s happening in those pools can bring out that liquidity. In Asia there is a mindset that firms will only trade if there is a lot of volume from the buy-side, so unless there is liquidity on the board they won’t participate, the ‘VWAP mentality’ as we know it.”

Quinn observes that this will also limit participation in markets where new trading venues have launched, at least in the short term.

“In Australia the existence of multiple markets was always going to increase the amount of high-frequency trading,” she posits. “As a result in Australia people are a little more apprehensive about leaving a footprint in the market, but as people become more comfortable you will see that changes.”

www.asiaetrading.com z January 2012 z Asia etrader

Head of Asia Pacific Trading Services AllianceBernstein “The low levels of liquidity are driving us to

18

DeRIVAtIVes

Gold Bugs swarming In Asia

T

rading in exchange traded gold futures reached 80 million contracts in Asia, an increase of 66% over 2010, with the Tokyo Commodity Exchange (TOCOM), the Shanghai Futures Exchange (SHFE) and India’s Multi Commodity Exchange (MCX) comprising 93.9% of trading across the zone.

The remaining 6.1% originated from two new entrants; the Thailand Futures Exchange (TFEX) and the Hong Kong Mercantile Exchange (HKMEx) who, judging by the growth in their initial volumes, should see that market share steadily increase. The Singapore Mercantile exchange who has both a physical and cash settled gold product hasn’t gained much traction so far and is not included in this report.

Worthwhile to note is that growth in trading volume hasn’t been uniform all year. First half year over year volumes in 2011 were, in fact, much lower than 2010 in India (43% lower), the world’s largest gold consumer and China (48% lower), the world’s largest gold producer. It wasn’t until after the US credit rating downgrade in August and continued Euro woes global gold trading spiked as investors looked to the

precious metal as a safe haven and risk hedge.

In September alone, 14.45 million contracts traded in Asia compared to 5.3 million on the US’s COMEX.

Open For Business The trading day in Asia starts at 08:00 China Standard Time (UTC/GMT +8 hours) when both the HKMEx and TOCOM begin their continuous auction sessions which falls at midnight in London and 19:00 in Chicago. TOCOM gold has the longest trading day in APAC where the exchange is open until 4am local time (19:00 London, 13:00 Chicago). Shanghai, despite its large volume, (18.3% of Asia) is open for only 4 hours. The common wisdom is that more trading hours mean more trading volume but research indicates that turnover doesn’t change but is just spread over the day.

China Late in 2010, China’s regulator the China Securities Regulatory Commission (CSRC) in a bid to cool derivatives trading believed to fuel inflation in that country forced the exchanges to increase trading fees and raise

margins in January 2011. This has resulted in lower volumes relative to 2010 in the first half of the year. However, in August, SHFE volumes swelled to more than 3.1 million contracts an increase of 74% from the 2.3 million contracts that had traded in the seven months prior.

September was the peak for trading with 4.3 million contracts turning over. For 2011, overall market share for Asia gold trading increased by 3.6% at the expense of Japan and India. China is largely a retail market with limited but growing algorithmic trading. Open interest tends to be erratic month to month averaging around 60,000 contracts in 2011 about the same for 2010.

India The MCX is by far the largest market for trading gold in Asia with nearly 51% of regional volume from that bourse alone. The mini gold contract which is only 100 grams and tailored to the smaller retail player accounted for 32.5% of overall trading volume with more than 26 million contracts trading hands in 2011. In fact, growth in the mini contract out grew the big contract by nearly 70% indicating the investor base is

Asia etrader z January 2012 z www.asiaetrading.com

DeRIVAtIVes

growing amongst smaller, first-time traders.

Open interest continues to be very low on the MCX with a 2011 average of just 14,600 and 44,500 for the mini gold despite the large volumes all pointing to a large day trader base. The exchange recently launched a 1g “gold petal” contract, as well, trading over 30 million contracts. India’s love for gold and its increasing middle class affluence is expected to see volume increase for years to come.

However, it should be noted that India is not the largest market by notional in the world. The US COMEX, whose futures contract is more than 3 times larger than any of Asia’s main gold products (3,110 grams vs. 1000 grams) traded more than 47 million contracts in 2011.

Japan The Tokyo Commodity Exchange has seen a 30% increase in gold trading over 2010 in both the large and mini contracts. In March, the month of the earthquake and tsunami, there was a dramatic rise in trading as investors sought a safe haven and then again in August with the US credit downgrade. It is interesting to note that volatility as measured by the VXJ Research

Group was much higher in March hitting a peak of 70.09 compared to 42.77 last August yet turnover was half as much (1.27 million vs. 2.58 million contracts, respectively). Open interest was higher in 2011 with an average of 121,000 compared to 108,000 in 2010. TOCOM, in the summer of 2010, lifted restrictions for foreign commodity brokers to access its market and recently amended its give-up policy to further facilitate business with these customers. It seems to be working.

New Kids on The Block As mentioned earlier, there were two new gold futures contracts launched recently at the Thailand Futures Exchange (August 2010) and the Hong Kong Mercantile Exchange (May 2011) as demand for these products in Asia continues to grow. In Thailand, volume has been impressive given the size of its economy and relatively small investor base with an average of 150,000 contracts per month. The HKMEx has seen volume steadily increase from 25,000 contracts in May to an estimated 140,000 contracts in December. The open interest, however, has been very low as spread

www.asiaetrading.com z January 2012 z Asia etrader

19

trading has dominated turnover. The HKMEx is expected to launch a Renminbi settled gold future in early 2012.

Competition Heats Up Competition among the regional exchanges has seen the extension of trading hours affording local participants an opportunity to take advantage of news and events during the western trading sessions. On September 21, 2010 TOCOM extended trading in its T+1 session to 4am and TFEX added a T+1 session August 2, 2011. The latter exchange has also been incentivizing market makers to boost volume and add liquidity in that country. There has also been talk in China for the Shanghai Futures Exchange to expand its trading session, too, particularly with the looming threat of the HKMEx. Gold, the de facto global currency has had a remarkable run over the last decade in tandem with the growth story of Asia. With the most of the world’s population concentrated east of Mumbai whose growing middle class affluence and budding trading industries have only shown us the tip of the proverbial iceberg.

20

DeRIVAtIVes

Asia etrader z January 2012 z www.asiaetrading.com

derivatives

Asia Derivatives Trading Recap 2011 ASX Derivatives Trading

99 213 131

366 758.0

49.57%

69 023 731

182 292.0

34.49%

Hong Kong Exchanges

National Stock Exchange India

29 947 556

174 327.0

14.96%

Osaka SE

1 207 580

NA

0.60%

Tokyo SE Group

582 858

NA

0.29%

TAIFEX

118 938

226.8

0.06%

244.5

0.02%

Bombay SE

36 642

Total region

200 130 436

Single Stock Futures Number of contracts traded Notional Turnover Exchange

Percentage

70.32%

National Stock Exchange India

148 122 267

820 794.0

Korea Exchange

55 642 385

29 700.4

26.42%

ASX Derivatives Trading

2 731 195

5 286.9

1.30%

TAIFEX

2 128 324

4 911.1

1.01%

Thailand Futures Exchange

1 498 177

NA

0.71%

Hong Kong Exchanges

421 538

1 470.1

0.20%

Bombay SE

89 908

580.6

0.04%

Total region

210 633 794

Korea Exchange

78.04%

National Stock Exchange India

TAIFEX

3451 963 899

82 239 700.0

784 043 285

4 579 750.0

17.73%

118 348 008

1 677 410.0

2.68%

Osaka SE

42 325 293

NA

0.96%

Hong Kong Exchanges

14 441 255

1 687 250.0

0.33%

ASX Derivatives Trading

9 512 832

447 891.0

0.22%

Singapore Exchange

1 956 982

NA

0.04%

ASX SFE Derivatives Trading

392 560

46 025.0

0.01%

Bombay SE

110 908

580.5

0.00%

Thailand Futures Exchange

103 664

NA

0.00%

Tokyo SE Group

19 236

NA

0.00%

0.9

0.00%

Bursa Malaysia Derivatives 16

Total region

4423 217 938

Stock Index Futures Number of contracts traded Notional Turnover Exchange

Percentage

23.43%

National Stock Exchange India

141 827 250

774 102.0

Osaka SE

127 928 937

3 407 300.0

21.14%

Korea Exchange

81 533 782

9 597 920.0

13.47%

Singapore Exchange

63 925 128

NA

10.56%

China Financial Futures Exchange*

62 000 000

NA

10.24%

TAIFEX

49 906 536

1 973 540.0

8.25%

Hong Kong Exchanges

46 868 563

4 310 750.0

7.74%

Tokyo SE Group

12 918 698

1 350 760.0

2.13%

ASX SFE Derivatives Trading

10 852 569

1 259 310.0

1.79%

Thailand Futures Exchange

4 043 214

NA

0.67%

Bursa Malaysia Derivatives

2 321 137

56 346.3

0.38%

Bombay SE

905 313

4 384.0

0.15%

ASX Derivatives Trading

227 583

3 773.4

0.04%

Total region

605 258 710

China Financial Futures Exchange Website * Estimated Jan - Dec

Stock index options and futures (Jan - Nov)

Percentage

Source : World Federation of Exchanges members

Stock Index Options Number of contracts traded Notional Turnover Exchange

Stock options and single stock futures (Jan - Nov)

Percentage

Source : World Federation of Exchanges members

Stock Options Number of contracts traded Notional Turnover Exchange

21

22

derivatives

Top 50 Futures Contracts in Asia Product

Volume Type

National Stock Exchange of India

US Dollar/Indian Rupee

694,909,157

Currency

Zhengzhou Commodity Exchange *

Cotton No. 1

275,238,040

Commodity

Zhengzhou Commodity Exchange *

White Sugar

238,785,008

Commodity Commodity

Zhengzhou Commodity Exchange *

Pure Terephthalic Acid (PTA)

225,240,476

Shanghai Futures Exchange *

Rubber

191,353,172 Commodity

Dalian Commodity Exchange

Linear Low Density Polyethylene (LLDPE)

189,120,162

Commodity

Shanghai Futures Exchange *

Steel Rebar

150,068,254

Metal

Dalian Commodity Exchange

Soy Oil

115,620,468

Agriculture

Shanghai Futures Exchange *

Zinc Futures

101,172,348

Metal

Dalian Commodity Exchange

Soy Meal

99,667,228

Agriculture

Shanghai Futures Exchange *

Copper

84,866,632 Metal

Korea Exchange *

US Dollar

57,664,511

Currency

Multi Commodity Exchange

Crude Oil

54,221,187

Energy

Dalian Commodity Exchange

Corn

53,426,642 Agriculture

Dalian Commodity Exchange

No. 1 Soybeans

50,203,230

Agriculture

Multi Commodity Exchange

Silver Mini

46,171,067

Metal

Multi Commodity Exchange

Silver Micro

45,854,735

Metal

Dalian Commodity Exchange

Palm Oil

45,022,762

Agriculture

Australian Securities Exchange *

3 Year Treasury Bond

39,470,395

Interest Rate

Tokyo Financial Exchange *

Australian Dollar/ Japanese Yen

39,277,662

Currency

Multi Commodity Exchange

Copper

33,680,166 Metal

Tokyo Financial Exchange *

US Dollar/ Japanese Yen

30,375,287

Currency

Multi Commodity Exchange

Gold Petal

30,241,582

Metal

Multi Commodity Exchange

Gold Mini

25,755,976

Metal

Tokyo Financial Exchange *

Euro/ Japanese Yen

25,246,238

Currency

Multi Commodity Exchange

Silver

24,165,511 Metal

Australian Securities Exchange *

90 Day Bank Bills

21,279,989

Shanghai Futures Exchange *

Aluminum

19,126,848 Metal

Interest Rate

Dalian Commodity Exchange

Polyvinyl Chloride (PVC)

18,827,522

Commodity Currency

National Stock Exchange of India

Euro/ Indian Rupee

18,036,238

Multi Commodity Exchange

Nickel

14,952,015 Metal

Tokyo Commodity Exchange *

Gold

14,853,974 Metal

Australian Securities Exchange *

10 Year Bond

14,271,199

Shanghai Futures Exchange *

Gold

12,798,548 Metal

Interest Rate

Multi Commodity Exchange

Gold

12,477,671 Metal

Tokyo Financial Exchange *

British Pound/ Japanese Yen

11,335,042

Natural Gas

Currency

Multi Commodity Exchange

9,733,051

Energy

National Commodity & Derivatives Exchange Guarseed

8,186,349

Agriculture

National Commodity & Derivatives Exchange Chana

7,266,838

Agriculture

Tokyo Financial Exchange *

3 Month Euroyen

6,881,447

Interest Rate

National Commodity & Derivatives Exchange

Ref Soya Oil

4,763,422

Agriculture

Shanghai Futures Exchange *

Fuel Oil

3,940,154

Energy

Tokyo Commodity Exchange *

Platinum

3,200,470 Metal

Tokyo Commodity Exchange *

Rubber

3,102,073 Commodity

National Commodity & Derivatives Exchange

Light Sweet Crude

3,054,635

Energy

Tokyo Commodity Exchange *

Gold Mini

2,988,557

Metal

National Commodity & Derivatives Exchange Pepper

2,359,441

Agriculture

Tokyo Commodity Exchange *

Gasoline

2,294,820 Energy

Zhengzhou Commodity Exchange *

Strong Gluten Wheat

1,915,940

Agriculture

National Commodity & Derivatives Exchange

Guar Gum

1,559,899

Agriculture

Total

3,186,024,038

United Stock Exchange and MCX-SX data not included * Jan to November 2011 Source from exchanges

Exchange

derivatives

Exchange

23

Top 10 Futures Contracts in Asia Product

Volume Type

National Stock Exchange of India

US Dollar/Indian Rupee

694,909,157

Currency

Zhengzhou Commodity Exchange *

Cotton No. 1

275,238,040

Commodity

Zhengzhou Commodity Exchange *

White Sugar

238,785,008

Commodity

Zhengzhou Commodity Exchange *

Pure Terephthalic Acid (PTA)

225,240,476

Commodity

Shanghai Futures Exchange *

Rubber

191,353,172 Commodity

Dalian Commodity Exchange

Linear Low Density Polyethylene (LLDPE)

189,120,162

Commodity

Shanghai Futures Exchange *

Steel Rebar

150,068,254

Metal

Dalian Commodity Exchange

Soy Oil

115,620,468

Agriculture

Shanghai Futures Exchange *

Zinc Futures

101,172,348

Metal

Dalian Commodity Exchange

Soy Meal

99,667,228

Agriculture

Total

2,281,174,313

Exchange

Top 5 Agriculture Futures Product Volume

Dalian Commodity Exchange

Soy Oil

115,620,468

Dalian Commodity Exchange

Soy Meal

99,667,228

Dalian Commodity Exchange Corn

53,426,642

Dalian Commodity Exchange

No. 1 Soybeans

50,203,230

Dalian Commodity Exchange

Palm Oil

45,022,762

Total

363,940,330

Exchange

Top 5 Commodity Futures Product Volume

Zhengzhou Commodity Exchange *

Cotton No. 1

275,238,040

Zhengzhou Commodity Exchange *

White Sugar

238,785,008

Zhengzhou Commodity Exchange *

Pure Terephthalic Acid (PTA)

225,240,476

Shanghai Futures Exchange * Rubber

191,353,172

Dalian Commodity Exchange

189,120,162

Total

Linear Low Density Polyethylene (LLDPE)

1,119,736,858

Exchange

Top 5 Currency Futures Product Volume

National Stock Exchange of India

US Dollar/Indian Rupee

694,909,157

Korea Exchange *

US Dollar

57,664,511

Tokyo Financial Exchange *

Australian Dollar/ Japanese Yen

39,277,662

Tokyo Financial Exchange *

US Dollar/ Japanese Yen

30,375,287

Tokyo Financial Exchange *

Euro/ Japanese Yen

25,246,238

Total

847,472,855

Exchange

Product Volume

Top 5 Energy Futures

Multi Commodity Exchange

Crude Oil

54,221,187

Multi Commodity Exchange

Natural Gas

9,733,051

Shanghai Futures Exchange *

Fuel Oil

3,940,154

National Commodity & Derivatives Exchange

Light Sweet Crude

3,054,635

Tokyo Commodity Exchange * Gasoline

2,294,820

Total

73,243,847

Exchange

Top 5 Metal Futures Product Volume

Shanghai Futures Exchange *

Steel Rebar

150,068,254

Shanghai Futures Exchange *

Zinc Futures

101,172,348

Shanghai Futures Exchange * Copper

84,866,632

Multi Commodity Exchange

Silver Mini

46,171,067

Multi Commodity Exchange

Silver Micro

45,854,735

Total

428,133,036

24

DeRIVAtIVes

Volatility in Asia

V

olatility across Asia ended 2011, on average, 44% higher than at the end of 2010 with several macro and local events fueling uncertainty and shaking confidence. Notable market shocks were the March 11 earthquake that struck Japan, the US Credit rating downgrade and the viability of the euro zone last fall.

The Japan earthquake had a profound affect not only on that island nation but across the globe. More than 20,000 were dead and missing as of last August with rebuilding and recovery efforts still underway. Despite the threat of nuclear radiation and Japan’s close proximity to the rest of Asia the volatility spike for this event remained a localize phenomenon having reached a peak of 70.09, more than 423% from its 2011 low of 16.56 as measured by VXJ Research Group at the Center for the Study of Finance and Insurance.

It’s notable to mention that this number was lower than the Lehman shock in 2008, however. Interestingly, March volatility was lower in Korea (down 1.2%) but higher in Hong Kong (9.2%) and Australia (up 18%).

The spring and early summer months of 2011 saw volatility drift lower with averages across all countries in Asia below both their 2011 average and their 200DMA. It wasn’t until Aug 5 when the S&P cut the long-term U.S. credit rating by one notch to AA-plus as Congress and politics failed to convince the ratings agency that a solution to reducing the American deficit could be found. This event triggered volatility around the world with month over month average volatility jumping 66% in Australia, 75% in Hong Kong, 58% in Japan and 74% in Korea. India was somewhat insulated seeing just a 38% rise in the NSE’s Volatility Index. This event triggered year high’s in volatility achieved in both Hong Kong at 51.97 and Korea (KOSPI 200 Volatility Index) at 50.11 more than 106% and 102%, respectively, compared to the 2011 average.

Volatility persisted in the months that followed the downgrade with the euro zone union coming into question again as previous interventions failed to deliver to the market. In fact, average volatility during the 3 months after the US lost its coveted AAA was higher than the previous 7 month average in all countries – Australia (97%), Hong Kong (91%), India (33%), Japan (36%) and Korea (92%). Once again, it appeared that India was insulated from world events more so than the rest of Asia. For all of 2012 India displayed the lowest stochastic volatility of any country in Asia and the lowest 200 DMA (23.71) at the end of the year.

Late November saw the European Central Bank (ECB) lower rates by 0.25% in an attempt to improve liquidity, the US Treasury Secretary Tim Geithner actively supporting the continent’s governments and a strong US unemployment figure all converged to drive a global markets rally that saw volatility subside at the end of the year. The S&P/ASX Volatility Index was the most affected by these events seeing average volatility approach its 2010 close (16.04) well below its 2011 average and 200DMA. Japan too, despite its rough year, saw its volatility drop below both its yearly average and 200DMA to finish the year at 24.9*.

Hong Kong, India and Korea all ended the year above their yearly average and 200DMA. Volatility in Asia last year demonstrated that markets are increasing interlinked and correlated, in varying degrees, to events that happen on the other side of the world. India appears to have the lowest changes in volatility while Hong Kong, according to the HSI Volatility Index, seems to have the highest despite its being the gateway to China

and pegging its dollar to the US greenback. Locally, Korea is subject to the whims of its wayward northern relatives and India has tensions with Pakistan and to some degree China. 2012 looks like the US may finally start to grow again but Europe’s troubles persist. If China’s economy softens this will affect Asia and Europe, particularly German, who sells more to the middle kingdom than any other euro block country and Australia whose mining industry is also very dependant. * All December data is based on Volatility from December 1

“The US’s Triple A credit rating downgrade August 5 triggered volatility around the world.”

Asia etrader z January 2012 z www.asiaetrading.com

26

Exchange Spotlight

A Leopard Can Change His Spots

S

ince 1987, the Australian Stock Exchange (ASX) had enjoyed a monopoly as a self-regulating utility for equities trading. As with all monopolies, fees were high, service was low with fat profit margins paid out to shareholders in the form of dividends rather than being reinvested in the business.

Having been demutualised in 1998, the ASX sought to put the Sydney Futures Exchange in its grasp to consolidate derivatives trading as well but failed in that attempt. They were not deterred and in 2006 successfully merged the ASX and SFE to create the Australian Securities Exchange. By this time, REG NMS and exchange competition was in full swing in the US and the European Union under MIFID opened its markets in 2007. The shackles of exchange monopolies were being broken around the world and Australia would be no exception. On March 31, 2010 the Australian Government endorsed competition between exchange operators for trading in listed securities. Nineteen months to the day on October 31, 2011 Chi-X Australia executed its first trade bringing an end to a 24 year monopoly.

The ASX could see the writing on the wall and had the experience of its global peers to counter this challenge to its dominance.

Particularly, in the UK at the venerable London Stock Exchange who baulked at competition and was slow to put in place its battle plans saw it lose a substantial amount of market share which it is still fighting to overcome. Not to fall victim to the same complacency, the ASX set out to overhaul its entire business with new investments, initiatives and incentives.

Technology Technology is what modern electronic trading and exchanges are made of. And at its heart is the NASDAQ OMX’s Genium INET which went live in the derivatives segment, called ASX Trade 24, October 11, 2010 and the equity segment, ASX Trade, November 29, 2010 pushing latency down to 300 microseconds and orders per second up to 100,000.

Supersonic matching engines capable of outsized throughput are the global standard and the ASX can count itself among them.

Like floor trading of the not too distant past, traders wanted to be as close as possible to the market and the advent of colocation

mirrored this behavior in the electronic era. The ASX introduced this service back in December 2008 with the likes of UBS, JP Morgan, Instinet, Optiver and Tibra Trading being among the first to populate the facility. A new home, dubbed the Australian Liquidity Centre (ALC), is slated to go live February 6 after a 3 month delay from an outage experienced in October. The ASX ALC is located at the Gore Hill Business Park in Artarmon only 5km northwest of Sydney’s Central Business District. The A$32 million facility is designed to be carrier neutral housing both ASX and ASX 24 market participants and vendors, including application service providers (ASPs), network providers, data vendors and independent software vendors (ISVs). All facility tenants can use their own domestic and international network service providers for communications outside of the building.

Australian Liquidity Centre Services: • Tier 1 and Tier 2 technical support.

• 24/7 security and surveillance.

• Locking cages.

• Two connection choices: Liquidity Cross Connect (LCC); and a Gateway in Cabinet (GiC) solution for standard latency connection.

• Delivery receipt and storage for up to 24 hours.

• Equipment installation.

The ALC is designated as a Tier 3 data center holding 47 Rack Units (RU). Each cabinet is supplied with 2 kW of power from two independent feeds along two independent power rails. VESDA fire control, DRUPS back up and redundant Meet-Me Rooms are just some of the facility features. ASX provides managed connectivity via fiber Local Area Network (LAN), point-to-point physical direct cable, an ASX Switch in Cabinet (SiC) or a Gateway in Cabinet element. The Liquidity Cross Connect is a 10 Gbit/s pipe whose length to the matching engine is the same for everyone providing location neutrality within the ALC. The GiC option offers 1 Gbit/s and allows for FIX Protocol connectivity to ASX.

Technical Information • A fiber connection as well as UTP Cat 6 standard cabling.

• Cabinets are 1.10 m deep and 0.80 m wide, with a 6-port fiber patch panel and a 6-port UTP patch panel. Front and rear

Centre Point Top 10 Brokers By Value* (A$ million) Deutsche $526.4 UBS Securities $430.8 Citigroup $356.8 Morgan Stanley $262.5 Macquarie $219.4 Credit Suisse $211.9 J.P. Morgan $201.9 Goldman Sachs $188.6 Merrill Lynch $169.7 Instinet $155.7 Top 10 Brokers By Trades* Deutsche 130,588 UBS Securities 129,010 Instinet 69,029 Citigroup 67,824 Merrill Lynch 58,233 J.P. Morgan 38,626 ITG 36,468 Macquarie 27,752 Morgan Stanley 26,965 Nomura 22,575

Centre Point crossing Top 10 Brokers By Value* (A$ million) UBS Securities $796.3 Credit Suisse $572.9 Goldman Sachs $343.8 Macquarie $308.2 J.P. Morgan $301.4 Deutsche $230.9 Morgan Stanley $230.5 Citigroup $190.0 Merrill Lynch $131.3 RBS Equities $81.6 Top 10 Brokers By Trades* UBS Securities 277,614 Credit Suisse 126,176 Deutsche 25,146 ITG 13,382 Instinet 1,874 Macquarie 718 Goldman Sachs 408 J.P. Morgan 372 Merrill Lynch 212 Citigroup 210 * Broker totals are double-sided.

Data from June 2010 to October 2011

Asia Etrader z January 2012 z www.asiaetrading.com

eXcHAnGe spotLIGHt

27

doors to the cabinets are standard 80 percent free air mesh doors and all are equipped with electronic locking.

• Standard 2kW of power per cabinet with additional power up to 6kW. Cabinets come with 32A/230V unmetered power rails.

• Connection speeds up to 10 gigabytes per second.

• Roof space available for antennae and satellite connections.

New Order Types With new technology comes the latest order types and order books. The new matching engine made it possible for the ASX to roll out a series of innovative transaction types. In 2010 Centre Point, Centre Point Crossing, Icebergs, and VolumeMatch were introduced then PureMatch in late 2011.

Each feature is catered for a specific segment of the market.

Centre Point Centre Point orders allow for market participants to trade anonymously by executing in a separate dark pool in which buyers and sellers are matched and trades executed automatically at the midpoint of the bid and ask prices current in the Central Limit Order Book (CLOB). Centre Point orders can only trade with other Centre Point orders completely separate from the CLOB. The venue has been a huge success for the exchange and the industry with price improvement as high as 42bps. (See Graph)

Centre Point Crossing Similar to Centre Point, this order type allows for orders to cross at the midpoint of the best bid and offer on the CLOB. However, the system “locks in” a price for up to 30 seconds, giving the market participant the option to execute within that period of time regardless of the price the name is showing in the CLOB after initiating the cross. Once executed the trade appears in the order book history.

This order has been very successful as well (See Graph)

Iceberg Icebergs are limit orders that allow market participants looking to buy or sell large quantities of securities but want to mask the true size of their order. Once the child order is filled a new slice is sent to the back of the queue at the limit or better price.

Undisclosed Orders ASX also makes it possible for participants to place orders without divulging the intended volume. These orders are available on order sizes of A$500,000 and up. Traders can elect to place day-only orders, fill-and-kill, or goodtil-cancel orders. Undisclosed orders can be used to indicate a size dealing commitment, in order to attract possible counterparties.

VolumeMatch VolumeMatch is the ASX’s non-display venue for block trading. Trade sizes are

www.asiaetrading.com z January 2012 z Asia etrader

no less than A$1 million with the reference price derived from the last price of the CLOB on TradeMatch.

PureMatch Built for high frequency trading, this display venue will offer the lowest latency trading and will operate in parallel to the CLOB. Using strict price/time priority with no auctions, crossings, hidden or contingent orders this venue will attract clients seeking pricing differences between itself and the main market.

28

Exchange Spotlight

Impact of New Order Types The additional flexibility of the new order types was a major success. Two University of Sydney professors, Andrew Lepone and Anthony Flint, studied hundreds of thousands of transactions over a sixmonth period and concluded that the use of Centre Point orders resulted in market impact effects that were 10.5 to 12.5 basis points lower than conventional transactions executed in the ASX central order book. The reduced market impact costs were partly offset by the higher fees for the newer order types: the exchange imposes a fee of 0.5 basis points for Centre Point orders, and 0.15 basis points for Centre Point Crossing orders. However, with the average price impact on the CLOB reaching over 12 basis points during December of 2010, Centre Point and Centre Point Crossing orders have been more than earning their keep.

Best Execution and Smart Order Routing With the ASXs multi venue platform, the introduction of Chi-X and the established brokerage community operating their own internalizers, smart order routing and best

execution governance protecting client interests are serious issues. The quality of execution must be verifiable and ASIC must be able to govern and impose these policies effectively. In order to achieve best execution smart order routers must be applied and the ASX’s answer is ASX Best. Powered

by Fidessa, ASX Best is a multi-market frontend with a smart order routing capability that provides a consolidated view of Australian listed equities across all display venues including Chi-X. Participants can manage venue routing priority and send orders directly to a specific venue, even non-display. This type of service will likely be used by the smaller broker who can’t afford to fabricate their own smart order router as the mainstream sell-sides will have built their own. However, the ASX levies an A$1500 per month tax for routing orders to Chi-X. Unfortunately, this will discourage connectivity, damage the exchanges role as a center for price discovery and undermine best execution. Old habits die hard.

Fees Slashed In anticipation of competition and expectations of how Chi-X prices executions in the other

markets they operate in, ASX dropped its transaction fees by more than 40 percent.

Headline fees went from 0.28 bps to 0.15 bps, on-market crosses were reduced from 0.15 bps down to 0.10 bps and offmarket crosses cut to 0.05 bps from 0.075bps. As it stands, Chi-X earns 0.18 bps per trade and ASX 0.30 bps.

Large War Chest ASX has been an enormously profitable enterprise because of its monopoly. In 2011, the exchange posted net after-tax profits of A$356.6 million up 7.2 percent YoY. The exchange was able to maintain a dividend payment of $1.83 per share equating to a 90 percent payout ratio. ASX, therefore, has substantial headroom available for further investment in technology, improvement of services, and fee cuts.

The Australian Securities Exchange has undergone a remarkable transformation in a very short time. It has reinvented itself and rose to the challenge of competition. There is still more work to do in the clearing space, however, but the ASX has shown itself to be agile, aggressive and to aggrandize its role as an exchange.

Asia Etrader z January 2012 z www.asiaetrading.com

30

RIsK

Hong Kong clearing House Risk Management Reforms

T

he Stock Exchange of Hong Kong completed an industry consultation for reforming its 3 clearing houses, the HKFE Clearing Corporation (HKCC), the SEHK Options Clearing House (SEOCH) and the Hong Kong Securities and Clearing Company (HKSCC), on October 28, 2011 with an 8 question survey. After the collapse of Lehman, the losses both the local and global industry sustained, and under the direction of the Securities and Futures Commission (SFC) the HKEx has begun a vigorous examination of its role as central counterparty (CCP). There were 4 main proposals contained within the consultation: I. introduce a normal margin structure and a Dynamic Guarantee Fund at HKSCC; II. implement more aggressive price changes for stress testing; III. modify the counterparty default parameters for stress testing; and IV. improve the Reserve Fund collateral constraints at the SEOCH and HKCC A press release issued by the exchange on July 8 cited Kevin King, HKEx’s Head of Risk Management. “The proposals reflect the changing dynamics of our markets and are vital to the strengthening of the risk management framework of our clearing houses.” He further went on to say “They also better reflect the risks associated with our market participants’ business activities.”

In the past decade there were two defaults borne by the CCP, Tai Wah Securities Limited in 2003 that lost HK$1.7 million and Lehman in 2008 recording a loss of HK$154.6 million. Are the changes far reaching enough? “The reforms are badly needed because the current level of clearing house guarantee funds is clearly inadequate” said Professor Jayanth R. Varma of the Indian Institute of Management. Bruno Campenon at BNP Paribas Securities Services agreed “Definitely, the reforms are much more dynamic and are reflective of what is happening in the market.”

IOSCO Standards In March 2011, IOSCO issued a consultative report “Principles for financial market infrastructures” intended to set a higher standard for the pillars of the capital markets.

The report, containing 24 principle directives, including recommendations for central counterparties, is what the HKEx is striving to

attain. Among them is adequate margining which the proposed Dynamic Guarantee Fund (DGF) hopes to achieve. As it stands, the HKSCC does not offer a comprehensive margin facility or a scalable Guarantee Fund structure potentially exposing the CCP to significant risk. The current Fixed Guarantee Fund has remained at HK$120 million since 1992 while turnover and market capitalization has grown by around 30 times over the years. “The design does address scalability” said Professor Varma when asked about the Dynamic Guarantee Fund. The size of the DGF would be derived from daily stress testing and will have no ceiling with counterparties required to pay a share reflective of their market exposure. Additionally, DGF contributions cannot be classified as liquid capital under the Financial Resource Rules of the SFC and they must be paid in three days down from the current seven days.

Smaller brokers, which Hong Kong has in abundance, will not be penalized under the new system. “Contributions are paid on the number of transactions traded not on the size of the company transacting them” added Robert Rooks, a Capital Markets Regulatory Consultant. A margin credit of HK$5 million will be given to every member leaving the burden of capital requirements on those who add risk to the market. Dr. Varma recognized that “The margin credit clearly benefits the small brokers.”

Mr. Campenon opined on the margin credit” I think it sustains the growth for those players and it’s a move in the right direction”

Professor Jayanth R. Varma Indian Institute of Management “I think the proposal that has been made is a good first step”

Bruno Campenon Head of Hong Kong BNP Paribas Securities Services “it’s much more fair to the participants”

Stress Test Under the proposed stress testing overhaul, price movements will be changed to 22% from 20% and up to 25% for Hang Seng Index (HSI) derivatives. Assumptions on default parameters will also be changed. Currently, default is calculated as the higher of the single largest counterparty or a 30% loss making position. It is proposed to be revised to the default of the largest and fifth largest counterparty. Mr. Rooks believes the changes “will help to further underwrite Hong Kong’s position as a safe place to trade”. Under the IOSCO report “when conducting stress testing, a CCP should consider a wide range of relevant stress scenarios, including peak historic price”. Hong Kong had witnessed an all time high price change of 21.75% back in June 5, 1989 thus the proposed

Robert Rooks Capital Markets Regulatory Consultant “a hybrid of these recommendations would be considered and applied locally”

Asia etrader z January 2012 z www.asiaetrading.com

risk

changes by the HKEX appear to be in line with IOSCO recommendations. Professor Varma would like to see more however saying “it’s a good first step, but more stringent assumptions need to be made over a period of time.”

Reserve Funds The calculation of the Reserve Fund (RF) at both the HKCC and SEOCH is the remaining proposal under consideration. Because of the capital deficiency generated under the stress test revisions stated above a Risk Management Fund (RMF) is being considered that could be built up over time from resources provided by all stakeholders of Hong Kong’s financial industry.

More immediately, an HKCC Contingent Advance is on the table through which the HKCC shares 50% of the daily Dynamic RF contribution with its counterparties where CPs are liable to pay in the event of a default. The changes to the RF at the SEOCH are intended to align itself closer to the practices of the HKSCC and HKCC. The biggest change will be that credit will be given to risk margin deposits and surplus funds in the daily RF calculation where none had existed before. The end result would see close to 90% of the SEOCH CPs having to pay less into the Dynamic RF.

If these proposals do indeed come to pass in Hong Kong the following financial resources will be required from the market: • HK$1.4 billion margin daily increase to the HKSCC • HK$1.1 billion daily increase of the HKSCC Dynamic Guarantee Fund • HK$280 million daily increase of the HKCC Dynamic Reserve Fund • HK$200 million daily decrease of the SEOCH Dynamic Reserve Fund In addition, HKEx is proposing to set aside additional shareholder funds of HK$900 million to boost its support to the clearing houses’ Risk Management collateral on top of the current HK$3.1 billion. While these funds will come out of shareholder equity rather than industry capital “the clearing houses do need the third line of support” maintained Professor Varma.

The HKEx has taken a proactive approach to its role as counterparty rather than reactive in the event of a default it would have been unable to support as a CCP. The proposed clearing house risk management reforms appear to be fair, flexible and follow international standards. The final report is due in early 2012.

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31

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32

Who’s Who

Ravi Apte Ravi Apte, the Chief Technology Officer of the National Stock Exchange (NSE) of India, sat down with Asia Etrader and gave us his views on latency and sponsored access. He explained how the dynamics of India’s electronic trading community has evolved and the ways the NSE has improved its technology to cater to the new generation of algorithmic and high frequency traders. He further talks about colocation, surveillance and the features the exchange offers that are not generally found in the West.

Asia Etrader – Why has the National Stock Exchange made such a large investment in technology?

Ravi Apte – India is a vast and diverse country. In order to enable access to the markets in such a large geography the NSE has been at the forefront in making available high speed connectivity that is reliable and yet affordable. For the end customers to access markets the NSE is perhaps the only exchange in the world that provides its own front end solution and, since 2008, it has also made available pre-trade risk management and multi-exchange connectivity solutions for its members, retail investors, HNI’s [high net worth individuals] and large institutional investors too. High throughput, low latency, resilient, scalable trading solutions, an online risk management solution to ensure the safety of the markets and an online market surveillance for market integrity are a must have for efficient functioning of markets and the NSE has been at the top of the charts for making this available. Products and services ranging from cash equities, debt instruments, futures and options on equities, corporate debt, a capital raising platform for companies, futures and options on currencies, global indices, securities lending etc. are being made available in our markets to investors thereby making our markets one of the most sophisticated and widely used in the world. Technology has made it possible for us to make all of the above available to

“...our engine latencies at 100,000 messages per second benchmarked at about 250 micro seconds...“ our markets and we operate a continuous improvement program to keep it current, contemporary and cost effective.

AE – How have you built resiliency and scalability into your trading infrastructure?

RA – The first thing we did was to look at the way members connect to us. Member connections to us were very similar to member connections to the New York Stock Exchange at the time of 9/11. We engineered an IP-based solution which was based on a set of nine Points of Presence (PoP) in major cities around the country. The idea was that individual members would connect to the

nearest PoP. The rationale for building these PoPs was also to establish a very high degree of resilience. A member has the choice of connecting to one or more PoPs and each PoP is connected to both our primary and secondary sites. The network was designed to have no “single point of failure”. If the primary site went down, the PoP would route the member transactions to the secondary site. We took the time to engineer and build the network, and then migrated all member connections. It has high capacity. It is highly scalable and highly resilient.

The second thing was to provide near infinite scalability at the trading engine.

How do you build near infinite scalability?

How do you get near infinite scalability at short notice? Traditionally trading engines were put in a bigger box and then two boxes or three boxes. But this cannot be done indefinitely. The number of members and order flow providers need to scale as well.

We are at the point now that all the key functions have been separated into layers with inter-layer communication taking place via low latency messaging. This allows for near infinite scalability as well as flexibility in product design. The high bandwidth middleware sends messages to the right matching engine and each engine can also scale. We can now add trading engines at very short notice and achieve near infinite scalability.

It can, therefore, be seen that we spend

Asia Etrader z January 2012 z www.asiaetrading.com

who’s who

33

“We have the tightest spreads in the region and, of course, algorithmic trading and colocation have all added to the volumes.”

time and money in engineering solutions, deploying them and then making them available to our users. Each stage of the activity is meticulously planned and designed for resiliency and scale.

“...we are seeing 250 million order messages

AE – Tell us about your matching engine and how many orders per second can it handle?

RA – Our latest matching engines have been fully tested and will go live shortly. It’s

“We have 200 thousand screens and innumerable algorithms at work all over the country...“ happening as we speak. The technology has been developed in-house and we have worked with associated companies and partners to architect and build the platform. We have 200 thousand screens and innumerable algorithms at work all over the country coming in through concentrators

per day...“ and different types of connectivity and we can balance the load by additional trading engines as needed. The new trading engines compare with the best in the contemporary world in regard to both throughput and latency.

AE – What kind of latency can we expect?

RA – This latency question is very interesting.

This is an oft misunderstood number. Latency and throughput are tied together. If you have very high throughput, you’re going to impact your latency. If you have low throughput and/or very simple orders you could have very low latency. The second question about latency is from where to where?

Latency could be measured in the trading engine or as seen from the member end, where it really matters. Currently our engine latencies at 100,000 messages per second benchmarked at about 250 microseconds on a single engine.

www.asiaetrading.com z January 2012 z Asia Etrader

AE – How has the trading volume increased over the past few years?

RA – Exponentially. The search for alpha is becoming more difficult. Spreads have narrowed. We have the tightest spreads in the region. And, of course, algorithmic trading and colocation have all added to the volumes. Five years ago we would have seen about 30 million order messages per day. Today we are seeing 250 million order messages per day. It is clearly attributable to DMA coupled with algo trading being allowed in India back in 2008. But it is not just the buy-side algos but sell-side algos as well. They are receiving large orders and slicing them up in to smaller child orders.

Only 3-4 percent of India’s population is active in the capital markets so we have a very long way to go.

AE – How are you managing, storing and disseminating the huge volumes of market data?

RA – We have many baskets for market data, which are all given to members for free. Can everybody absorb tick data? Most people take the fast broadcast where they get all the symbols and 5 levels of the order book bid and ask every second. Members who use algorithms or doing High Frequency Trading are subscribing to tick data. Typically all data is multicast out to the PoP and on to the member. There are sufficient controls built in to the market data mechanism for recovery.

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Who’s Who

“Only 3-4 percent of India’s population is active in the capital markets...“

AE – Are there any difference between the NSE and say exchanges in the US? RA – There are three that come to mind where I think that the Indian market are different. The first is that we are at T+2 for cash equity and T+1 for derivatives. The second difference is that NSCCL [National Securities Clearing Corporation] does real time risk management for all the market participants. If a member uses their entire collateral towards margin, they are not allowed to build more positions.

The member receives warnings at various intervals but if they continue to use up their collateral they are switched off automatically.

They cannot build new positions. They are provided with a facility that allows them to reduce their positions only. This is a sophistication which does not exist in the US. The third interesting aspect is that we provide a degree of online cross-margining across asset classes, providing a significant amount of capital efficiency to our members.

These are three things which are generally not available in the west.

AE – How is the makeup of the trading industry changing? What kinds of traders are you now starting to see?

RA – Going back 20 years ago members were all family members who owned a seat.

The grandfather owned a firm then the sons ran it and then the grand children ran it. It was an exclusive club. The game changed when the NSE was formed over 17 years ago. The members no longer owned the exchanges. The NSE was setup by large financial institutions. Anyone could show up with capital, fill out the paper work and once SEBI approved the application, they were in business and NSE welcome all crosssections of society to setup and operate memberships. All of a sudden a large number

of people who were out of the game were now in the game and they also developed into big players. Now we have seen the next wave of younger people who are technically qualified, who are hungry and who have fire in their belly. They come, write their software and start trading, generate a lot of volume and make good money. It’s mind boggling. Members who didn’t exist 2 years ago are doing millions of trades every day.

They came out of college 5 years ago and 2 years ago they took a membership and they’re writing software, and they’re doing an incredible job. We have retail brokers, institutional brokers and prop firms. Overall we have a very healthy ecosystem with lots of players. There are 90 thousand member offices and sub-broker offices and authorized

“We provide a degree of online crossmargining across asset classes...“ person locations in the country across 3,500 towns. That puts an NSE member owned or member-sub-broker owned facility in every town in the country which has a population of more than 10,000.

AE – Tell us about the NSE surveillance system and how you are dealing with abusive traders.

RA – We have a real-time surveillance department. There is a group of people who are actively monitoring the trading that is going on at the exchange. They have a lot of smart applications, created alot in-house models for checking trading patterns and behavior. All exceptions and alerts are tracked, monitored and, if required, investigated too. All of this is done with the sole purpose of maintaining the integrity of the markets.

AE – Tell us about the NSE colocation service.

RA – Our Colo service has been live for two years since January 2010. There’s a

constituency of people who want to be right next to the exchange so we built it for these types of members. There are almost two hundred racks and it is operating at full capacity. Every rack in the colo center experiences the same latency to the matching engine and everyone receives the same bandwidth, 6kv of power, two power supplies with a UPS generator in an air-conditioned environment. The center has 24-hour security. Members can only get in to the colo site after the end of trading hours at 5pm.

AE – About three years ago the NSE created a cloud could you tell us about that?

RA – It’s one of the largest cloud offerings in the financial services industry. Procuring, implementing and managing an order management system, pre-trade risk management system, providing multiple forms of connectivity ranging from VSAT to internet using mobile and smart phones is a gargantuan task and does not come cheap.

[Neat on Web] NOW was created to deliver a specific set of solutions to smaller members who don’t have the technical sophistication or budgets. 900+ members have signed up to use this cloud platform. 25000+ users login every day to access markets with over a million messages passing through this cloud and volumes top US3 billion daily. All members/users have their own slice and it’s completely elastic. While some members

“Members who didn’t exist 2 years ago are doing millions of trades every day...“ may have 50 users some others may have 5,000+ customers.

It also offers access to multiple exchanges including the BSE and other commodity exchanges. Smart order routing is also available making the investor choose the venue of execution in a smart way too. This makes it possible for members and users to

Asia Etrader z January 2012 z www.asiaetrading.com

WHo’s WHo

“There are 90 thousand member offices across 3,500 towns.“ access their investment or product avenues from a single access point. NOW enables members to focus on their core business, expand business as and when they think, sign up investors and grant them access on the move and most of all it renders reliable service with toll free support added in.

AE – What’s your view on sponsored and naked access?

RA – All orders that flow in to the exchange are required to pass through a member’s pretrade risk management solution. This is by way of regulation. This ensures that the order has been eye-balled for simple order checks viz. price, quantity, eligibility, validity, etc. It also makes sure that the order has passed through the pre-trade risk management requirements of the member. By doing so, enough precautions are taken to avoid possible mishaps. By the way, all of this can be automated too. In order to drive a vehicle one needs a valid license, and if one has to participate in an F1 or MotoGP, one has to be trained well. The vehicle has to pass the best checks for speed, safety and reliability.

It is similar in the case of orders flowing from investors into an exchange.

AE – The NSE and BSE have begun cooperation with one another. Can you tell us what the nature of that cooperation is?

RA – Members are now able to send orders to BSE using NSE’s NOW offering. Similarly orders can be routed to NSE using BSE’s [FasTrade on Web] FOW offering.

AE – How does the NSE support FIX protocol?

RA – Our FIX implementation is slightly different. Typically exchanges have a common FIX gateway. In our implementation we have a FIX adapter at the member end which regulates the flow of traffic and also does FIX translation. In effect, we have more

than 8,000 fix adapters, one at every Trader Access Point (TAP). The TAP has many functions. It maintains connectivity to the exchange, it prevents small line tripping, it distributes market data and it also does FIX conversion and sends messages to the exchange. Then on the way back the TAP reconverts the message back to FIX. Because the FIX conversion is distributed to thousands of points there is no queuing up at the exchange. FIX 4.2 has been available since early 2010 but we have only seen a modest usage thus far.

AE – What is the purpose of the vendor and empanelment process?

RA – Take an order management system.

Not everyone builds their own order

“It’s one of the largest cloud offerings in the financial services industry“ management system because of cost or expertise or other factors. Now, that order management system in India has a name and it’s called the CTCL – the computerto-computer link. This CTCL has to talk to the exchange API and is supposed to have some basic checks, risk management rules and provide for an audit trial.

Ideally, a member could say “I have built an OMS in-house and I would like to deploy it”. Then the exchange says “please come and demo it to us and answer our list of questions.”

The demo is important as it lets the exchange perform its due diligence on what is being used by the member to send orders in to the exchange systems.

Empanelment is to protect the entire market and the trading ecosystem.

If a vendor offers a trading solution then they have to go through the same process and do a demo with the exchange. Once the exchange empanels them, they then can roll it out to their customers.

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equItIes

Asia’s Fragmentation Footprint 2011 Fragmentation in Asia’s equity markets has been slow to evolve but grew steadily last year largely due to regulatory revamp, market structure change and mind-set amongst local buy-sides. Given its pervasiveness and impact on trading in the west and continued growth in the east we have put together this report in an attempt to measure the width and depth of Asia’s Fragmentation Footprint.

Japan Japan has had a competitive execution regulatory framework for more than a decade but fragmentation didn’t really accelerate until the Japan Securities Clearing Corporation (JSCC) began clearing Proprietary Trading System (PTS) trades and Chi-X Japan entered the market in late 2010. There is already one victim in the PTS space – Kabu.com closed its doors after 5 years on October 31. This PTS operator focused on retail and never really gained much traction. The venue was more of a victim of regulation than competition and its demise cost the Japanese electronic trading industry, let alone Mitsubishi UFJ, the owner, a great deal. That leaves just 4 JSCCeligible venues in Japan – the primary Tokyo Stock Exchange (TSE), the Osaka Securities Exchange (OSE), Chi-X Japan (CHIXJ) and SBI Japannext (SBIJ). If we look at Graph 1 we can see PTS market share growing steadily last year and Graph 2 shows it is at the expense of the TSE. It is interesting to note that the US downgrade in August and ensuing volatility saw investors return to the primary for liquidity with SBIJ’s market share suffering the biggest hit. Through most of the year Chi-X had a slight lead in market share but SBIJ recovered from its August low and now seems it is taking back that share from Chi-X as the primary’s percentage has remained steady during October and November. Average trade size has been volatile on the PTSs during 2011. SBIJ averaged US$7,800 for the year and CHIXJ US$7,700.

The more established OSE and TSE averaged US$8,546 and US$19,544, respectively (Graph 4). The average trade size on the primary is trending lower which is in-line with a growing high frequency trading base. The TSE’s collocation facility has been seeing more and more trading originating from within its data center. The OSE averaged 4.75% of equity market share in 2011.

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equItIes

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“Through most of the year Chi-X Japan had a slight lead in market share over SBI Japannext but that changed in October”

SBIJ is a conglomerate alternative while Chi-X Japan is wholly owned by Chi-X Global Holdings which is also a conglomerate.

There are several broker aggregators in Japan internalizing flow where these trades must be reported to the Tokyo Stock Exchange Trading NeTwork (ToSTNeT) as off exchange crosses. Thus, ToSTNeT data provides a reasonable estimate of broker non-display flow. As we can see in the chart both volumes and value have been increasing since 2009.

ToSTNeT Statistics Year

Volume

Value (Yen Mill)

2009

36,415,138

26,684,822

2010

40,437,055

28,685,401

2011*

42,926,039

28,924,138

* Jan - Nov Source: TSE website

Visibility into this dark venue is completely opaque as broker volumes and trade sizes remain tightly held with the exception of Instinet Japan. In its non-display venue average trade sizes decreased throughout the year (Jan – Nov) with volume almost tripling to more than US$$165 Million in November (Graph 5). It looks like some HFT clients are on-board.

Australia October 31, 2011 was the day competition finally arrived Down Under with the first trade from Chi-X Australia. From day one the upstart garnered support from 22 brokers eager to find the best possible price for clients. Bringing with it international expertise and a maker-taker pricing model of 6 bps for passive orders and 12 bps for aggressive trades; meaningful data is still a few months away.

It is difficult to say whether the venue will be successful, however, despite the long road they have taken to get to launch. The regulator the Australian Securities and Investments

Trades Chi-X

ASX

Percent

Oct

833

13,617,518

0.01%

Nov

227203

12,988,440

1.72%

ASX

Percent

Value USD Chi-X Oct

4,060,640

89,734,636,800 0.005%

Nov

227203

12,988,440

0.88%

Avg.Trade Size (USD) Chi-X

ASX

Oct

4,875

6,590

Nov

3,160

6,230

Average trade size on ASX A$7,460 (Jan – Nov)

Commission (ASIC) has said that tick sizes on Chi-X and the primary must be the same and Australia’s equity market is relatively small but more importantly is the way the ASX has transformed itself in anticipation of competition. In particular is the introduction of new order types that effectively create new trading venues for different client needs.

Chi-X’s entry into Australia has resulted in 5 venues rather than 2. Besides the Central Limit Order Book (CLOB), the ASX offers two mid-point matching services Centre Point and Centre Point Crossing each have gone from nothing in June 2010 to executing A$1.7 Billion (US$1.7Billion) in September offering price improvement of up to 47 bps. There is also VolumeMatch a block trading facility and PureMatch a venue for HFTs. Neither venue has attracted much interest, however. Chi-X is also stuck using the ASX’s clearing apparatus eliminating any competitive advantage there as well. Chi-X

www.asiaetrading.com z January 2012 z Asia etrader

Australia has a lot going for it of course, great technology, knowhow, a highly recognized and successful global brand and in their second month achieved more than 1% of total trading turnover. There is certainly a place for high frequency trading arbitrage between venues but this may be hampered or even eliminated by a proposed ASIC levy based on volume.

As for internalizing broker flow, that data too is hard to come by but we’ll be trying!

Singapore The smallest developed equity market in Asia averaging around USD1.1billion per day is the home of Chi-east the Chi-X Global / Singapore Exchange joint venture. Chi-east is a broker to broker darkpool that reported volume totaling US$71.06 million in Q3 2011. It should be noted that this volume is across Singapore, Hong Kong and Japan markets. Given Singapore’s small size we don’t expect any other alternative trading venues to emerge in the island nation.

We don’t see any high frequency trading materializing between Chi-east and SGX either as minimum trade sizes allowed in the dark must be S$150,000 or 50,000 shares on the primary. Average trade sizes on SGX were around S$8300 or 6800 shares per trade.

Hong Kong Asia’s second largest developed market has more than 20 broker internalizer pools.

It is very likely Hong Kong won’t see another competing venue with the Hong Kong Exchange (HKEx) for some time if ever. The HKEx has a legal monopoly much to the detriment of the industry and the benefit of shareholders. However, the HK SFC is watching how competition is playing out in other markets and has begun to track the volume the sell side is crossing internally.

While neither the exchange nor the regulator will publish a number for off exchange, non-

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equItIes

display trading it is widely believed to be around 8% to 10% of the primary exchange volume. To put that in context in November the HKEX turned over HK$59,828 Million (US$7,701 Million) per day thus brokers are internalizing as much as US$770 Million each day. Average trade size on the HKEx in November was HK$ 70,576 (US$9,085)

Other Venues Liquidnet reported in November the following various general statistics for Asia. Average daily volume was US$69 million and average execution size was US$1.22 million (56 trades per day). There was no specific information on number of trades or what markets these figures pertain to.

Spread Costs According to a November report from Nomura’s Execution Consulting Services the half spread cost of trading in Australia is around 44bps, Japan 15 bps, Hong Kong 33 bps and Singapore 60 bps.

Fragmentation in Asia has become a real and measureable phenomenon and is only expected to evolve in step with the industry.

While we recognize that a complete, granular picture is hard to come by with the sell side reluctant to show its hand we will continue to bring you this quarterly report in the hopes that the we can piece together secondary equity market trading in Asia.

Notes: Data in this report spans January – November 2011 Sources for this report were Thomson Reuters Equity Market Share Report, press releases and Exchange data

Asia etrader z January 2012 z www.asiaetrading.com

equities

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Asia Equity Trading Recap 2011 2011 was a volatile year for equity trading in Asia. The first half of the year saw markets holding on to gains from 2010 but that changed in the second half with markets selling off in Asia and ending lower boding ill for investors and the brokerage industry.

T

he Tokyo Stock Exchange was the largest bourse in terms of value of shares traded up 8% to US$3.7 trillion edging out the Shanghai Stock Exchange which saw almost US$3.5 trillion down 14.6% from last year. The Korea Exchange had the largest increase year over year in trading value up 28.7% to US$1.88 trillion. Both India bourses came in at the low end with value traded down 41.3% on the BSE and the NSE down 24.7%. Total share trading value in Asia was US$16.755 trillion.

The NSE saw the most trades in Asia last year with almost 1.28 billion shares trading hands. A close second was the Shanghai

Stock Exchange at just over 1.2 billion shares turning over. Average trade size was the largest on the Tokyo Stock Exchange coming in at US$11,777, the Stock Exchange of Hong was next at US$8,685, followed by the Australian Securities Exchange (US$7,574), the Philippine Stock Exchange (US$6,542) and Bursa Malaysia (US$5,836).

Total market capitalization in Asia reached US$14.8 trillion in 2011 representing just over 31% of the global total. The Tokyo Stock Exchange had the regions highest market cap at US$3.29 trillion, followed by Shanghai (US$2.45 trillion), Hong Kong (US$2.18 trillion), Australia (US$1.24 trillion) and Shenzhen (US$1.18 trillion) rounding out the top 5. These

5 markets accounted for just under 70% of equity market capitalization in Asia.

Asia had 21,922 listed companies on its exchanges in 2011 representing 47.85% of the global total. The BSE had the most with 5,105 companies. Tokyo was next listing 2,284 firms and rounding out the top 5 were Australia (2,022), Korea (1,809) and the National Stock Exchange of India (1,633). The Singapore exchange had by far the most foreign listing with 310 companies or just over 60% of the Asia total (514).

Note: All data was provided by the World Federation of Exchanges. Due to time constraints for this magazine going to press data is from January to November only.

Value of share trading (USD millions) Exchange

Jan-Nov % Total

% change/ Jan-Nov (in USD)

% change/ Percent (in local curr)

8.0%

-1.8%

Asia-Pacific

Tokyo SE Group

3 734 859.2

22.29%

Shanghai SE

3 495 594.6

20.86%

-14.6%

-18.2%

Shenzhen SE

2 684 724.1

16.02%

-16.7%

-20.3%

Korea Exchange

1 883 462.6

11.24%

28.7%

21.8%

Hong Kong Exchanges

1 372 963.9

8.19%

-0.5%

-0.4%

Australian SE

1 126 261.3

6.72%

14.8%

-0.3%

Taiwan SE Corp.

842 242.1

5.03%

5.5%

-2.1%

National Stock Exchange India

553 608.5

3.30%

-24.7%

-24.0%

Singapore Exchange

272 766.0

1.63%

1.8%

-6.7%

The Stock Exchange of Thailand

209 686.9

1.25%

7.7%

4.3%

Osaka SE

177 068.8

1.06%

8.1%

-2.2%

Bombay SE

141 278.7

0.84%

-41.3%

-40.9%

Bursa Malaysia

127 951.7

0.76%

27.0%

20.3%

Indonesia SE

103 253.4

0.62%

8.5%

4.4%

Philippine SE

24 888.6

0.15%

26.5%

21.7%

Colombo SE

4 788.9

0.03%

3.7%

1.4%

Total region

16 755 399.2

100.00%

Source: World Federation of Exchanges

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equities

Number of trades in equity shares (in thousands) Exchange

Jan-Nov

% Total

Average Trade Size (USD)

Asia-Pacific

National Stock Exchange India

1 277 052.9

22.0%

434

Shanghai SE

1 209 504.1

20.8%

2,890

Korea Exchange

1 080 103.5

18.6%

1,744

Shenzhen SE

965 567.0

16.6%

2,780

Bombay SE

366 306.3

6.3%

386

Tokyo SE Group

317 134.6

5.5%

11,777

Taiwan SE Corp.

191 447.9

3.3%

4,399

Hong Kong Exchanges

158 083.1

2.7%

8,685

Australian SE

148 700.8

2.6%

7,574

The Stock Exchange of Thailand

40 372.3

0.7%

5,194

Indonesia SE

25 840.5

0.4%

3,996

Bursa Malaysia

21 922.7

0.4%

5,836

Colombo SE

4 394.1

0.1%

1,090

Philippine SE

3 804.3

0.1%

6,542

Total region

5 810 234.1

100.0%

2,884

* Source: World Federation of Exchanges

Domestic Market Capitalization (USD millions) Exchange

As of November

Average Market Cap

Asia-Pacific

Tokyo SE Group

3 286 515.4

1438.9

Shanghai SE

2 451 860.5

2639.2

Hong Kong Exchanges

2 184 462.8

1479.0

Australian SE

1 244 624.0

615.5

Shenzhen SE

1 180 668.8

846.4

Bombay SE

1 086 534.7

212.8

National Stock Exchange India

1 062 680.4

650.8

Korea Exchange

1 008 235.2

557.3

Taiwan SE Corp.

617 032.7

756.2

Singapore Exchange

556 337.7

719.7

Bursa Malaysia

386 789.0

409.7

Indonesia SE

375 887.3

864.1

The Stock Exchange of Thailand

263 658.9

485.6

Osaka SE

213 496.4

173.2

Philippine SE

160 793.7

638.1

Colombo SE

19 478.0

71.6

Total region

14 822 878.8

676.2

Americas

Total region

Europe – Africa – Middle East

31.26%

19 304 594.2

40.71%

Total region

13 286 700.8

28.02%

WFE Total

47 414 173.7

100%

Source: World Federation of Exchanges members

Asia Etrader z January 2012 z www.asiaetrading.com

equItIes

Listed Companies in Asia November Exchange

Total

Domestic

Foreign

Percent

Americas Total region

10 545

23.02%

Asia-Pacific Australian SE

2 022

1 929

93

9.22%

Bombay SE

5 105

5 105

NA

23.29%

Bursa Malaysia

944

936

8

4.31%

Colombo SE

272

272

NA

1.24%

Hong Kong Exchanges

1 477

1 454

23

6.74%

Indonesia SE

435

435

0

1.98%

Korea Exchange

1 809

1 792

17

8.25%

National Stock Exchange India

1 633

1 632

1

7.45%

Osaka SE

1 233

1 232

1

5.62%

Philippine SE

252

250

2

1.15%

Shanghai SE

929

929

NA

4.24%

Shenzhen SE

1 395

1 395

NA

6.36%

Singapore Exchange

773

463

310

3.53%

Taiwan SE Corp.

816

769

47

3.72%

The Stock Exchange of Thailand

543

543

NA

2.48%

Tokyo SE Group

2 284

2 272

12

10.42%

Total region

21 922

21 408

514

47.85%

Europe – Africa – Middle East Total region

13 349

29.14%

WFE Total

45 816

100.00%

source: World Federation of exchanges members

www.asiaetrading.com z January 2012 z Asia etrader

41

42

opInIon poLL

opinion poll 1 What is the Life Span of an Algo?

A

daptability in volatile trading markets is necessary to survive. Volatility jumped this summer and we wanted to see how traders where changing their approach to overcome this difficulty.

We ran this opinion poll from September to mid October and the findings were right on the money.

While 28.6% of respondents claimed “no change”, the increased volatility seems to have motivated traders to adapt and change the way they use algorithms. It would be interesting to know what algos the “No change” camp were using and, more interestingly, which broker.

The remaining responses, however, maintain that traders are trading differently and do provide some insight on just how they are going about it.

Robert Liable Head of ETS and PT Sales at Nomura said that “we have seen a movement toward shorter term time horizons (like Implementation Shortfall), and a shift toward DMA as opposed to Algos” lending support to the different algos (21.4%) response.

The use of VWAP as a benchmark in Asia is wide spread but its dependence on historical volume profiles may cause poor performance during volatility where the profile no longer holds. It is very likely that VWAP traders in Asia account for the larger percentage of those rotating into other opportunistic volatility favoring algos and alternative venues to find liquidity at a fair price.

That brings us to respondents who admitted using more alternative trading venues (14.3%). A related press release from Chi-East lends credence to this notion. The independent, pan-Asian, non-display exchange experienced significant quarter on quarter increases in order flow from July to September 2011 to the tune of a 203%. Granted, the figures started from a lowbase coming in this quarter at US$71.06 million but as a broker to broker alternative Chi-East is something of a barometer in terms of alternative trading venue usage in Asia.

14.3% of respondents affirmed that the decision to rely more on dealers and high touch trading

was how they were coping in a volatile market.

The expertise and skill-set of dealers who can work orders for names which they are intimate with are an acceptable alternative for someone who is willing to pay a much higher price to find liquidity.

Those stopping to trade entirely until volatility resides made up 21.4% of those polled. Not good news for brokers. This might be an interesting opinion poll to ask in up markets that are volatile as perhaps these traders are all in cash and waiting until stocks move higher.

Ultimately, the majority of the feedback we received confirmed the obvious, which is that market volatility is presenting challenges to profitability. If Darwin was developing algos perhaps he might have said “It is not the strongest algorithm that survives, nor the most intelligent, but the one most responsive to change.” With little reason to expect volatility to wane in light of the ongoing global malaise one would expect to see the need for algorithmic trading adaptation to continue.

Asia etrader z January 2012 z www.asiaetrading.com

opInIon poLL

43

opinion poll 2 What Market Share Will Chi-X Australia Capture in The First 2 Months?

T

he arrival of competition in Australia has heralded a new age for securities trading with best execution, improved services, lower fees and, best of all, choice.

Fulfillment took more than 3 years to achieve as government needed to bestow its blessing and the ASX itself needed reregulating before any alternative venue could begin operations. Needless to say this did cause some frustration to certain parts of the electronic trading ecosystem and, perhaps like London, may have made participants eager to trade away. We thought an Opinion Poll to measure the perceived or hoped for success of Chi-X was in order.

We found that 50% of those who volunteered to be polled said that Chi-X Australia would garner between 2-5% of the Australian Securities Exchange equity trading volume in just two months. That is a huge endorsement for the display order book to suggest that as much volume as that could move so quickly away from the ASX. Well the truth is they were right. Chi-X

has in fact gathered more than 2% of market share but they only needed one month to reach that level.

That optimism could be seen throughout most of the opinion poll in fact, with more than 18% expecting Chi-X to capture between 5 and 10% of market share and almost 8% of those who were polled offered greater than 10% of the ASX turnover would be lost to the new contestant.

Like with most things in life there are always a few pessimists with nearly 4% of respondents thinking that Chi-X would just close up and go home. If we look at the changes the primary exchange has made over the past year with new technology, lower fees and new order types and the Market Integrity Rules mandating tick sizes you have to wonder what competitive advantage Chi-X has that is so compelling besides its own fee schedule. This could also be the reason that the second most voted result was for less than one percent (19.74%) of market share. When

www.asiaetrading.com z January 2012 z Asia etrader

putting any new technology into production after it’s been thoroughly tested usage is ramped up slowly and methodically. Chi-X did, in fact, take the cautious approach allowing just 10 names to trade and complete a settlement cycle before taking their finger out of the dam.

All that is needed now is competitive clearing and with Chi-east, the sister company of Chi-X, using LCH Clearnet that will only be a matter of time.

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

44

post tRADe

A clear opportunity New trading platforms in Japan and Australia have brought competition to trading, but to achieve further efficiency, the Asian market needs competition in clearing.

H

aving now reached Australia and, some time ago, Japan, competition between trading venues in Asia is creating greater efficiencies for trading firms.

However the frictional costs associated with shrinking trade sizes are growing.

In Australia the average value per trade has fallen 9.3% over the year from US$7857 in Q1, to US$ US$7123 in Q3, according to Thomson Reuters Equity Market Data Reporter. At the same time, the monthly trade count grew 32.2% from a monthly average of 12,102,200 trades in Q1 to 15,990,839 in Q3.

Japan has seen the average value of trades fall 7.5% from US$19,160 in Q1 to US$17,726 in Q3, and although trade count has fallen over the same period, that is skewed somewhat by the high trading volumes in March, when the count leapt by 50% month-on-month following the

tsunami. If March is omitted, average monthly trade count rose 4.3% from Q1 to Q3.

That increase in costs is primarily rising fastest in the post-trade part of the lifecycle of the trade.

“Because post-trade fees are often correlated with the number of tickets, if we do nothing as an industry [to address them], it will cost us more to process the same value of trades,” warned Robert Barnes, CEO of UBS MTF. Pressure for competition in clearing also stems from the limited viability of alternative trading venues in a low volume market, notes Mike Aitken, chief scientist at technology research facility Capital Markets Cooperative Research Centre. He argues that the low-cost model that alternative platforms operate under is challenged in a way that the exchanges will not feel, due to their additional revenue streams

from clearing and settlement, data and primary market listings.

“Competition in clearing is a necessary step,” he said. “ASX makes about 30% of its fees from post-trade and about 10% from its secondary market. Chi-X Australia is competing with it for around AUS$50 million of business, which will fall to AUS$25 million as they cut fees. So let’s say they double volumes. If Chi-X gets a 30% share, that’s AUS$15 million. That’s not a lot to justify its existence.”

Tal Cohen, CEO of Chi-X Global, Chi-X Australia’s parent company, is very cognisant of the effect that post-trade costs will have on the business. He says that the firm will consider using LCH.Clearnet, which is set up to manages post-trade for Chi-East, the company’s panregional dark pool, as an alternative to ASX’s clearing operations in Australia.

Asia etrader z January 2012 z www.asiaetrading.com

post tRADe

“If we can do that where we gain scale and scope by introducing a global clearer then we’ll have those discussions,” he asserted. “Just as there are clearers operating across Europe, it’s time to have conversations with markets in Asia.”

“They aren’t going to come here just to do Australia,” added Aitken.

Pan-regional clearing A single regional clearer would follow the line of America’s much vaunted post-trade utility the Depositary Trust and Clearing Corporation (DTCC); the ASEAN countries are considering a pan-ASEAN link which has involved some discussion about introducing a single counterparty. However, Barnes says that building a single new pan-regional clearing house in Asia, along the lines of the DTCC, would not be in the interests of market participants.

“If people want to build one more CCP that is their choice, but if you look at the wider, collective cost base, if you force everybody to switch to one CCP you impose costs on the industry,” he said.

Equally, creating multiple individual clearing houses can multiply costs. In India the two exchanges, the Bombay Stock Exchange and the National Stock Exchange each operate their

own clearing houses; however if a same stock order is split across the two exchanges a firm effectively doubles the settlement costs for a single stock name.

A workable alternative, Barnes suggests, would be the implementation of interoperability agreements as recently adopted in the European market. In 2003, SWX Swiss Exchange began offering a choice of LCH. Clearnet and x-clear as clearing houses, which in 2008 the London Stock Exchange replicated by introducing x-clear as a central counterparty alongside LCH.Clearnet. Those models performed safely during the financial crisis but also delivered commercial benefits.

“In Europe we have seen clearing fees evolve as these numbers have scaled; a few years ago we paid 65 euro cents to clear a Dutch trade on Clearnet and today if you are skilled you can get that nearer to 1 euro cent,” said Barnes.

When the user community asked to expand the model into offering more than two CCPs, the UK, Swiss and Dutch regulators stepped in to review the structure; the result was a revised model for interoperability that maintained the existing activity of LCH.Clearnet / x-clear in the UK and Switzerland, but also enabled additional CCPs, EuroCCP, owned

www.asiaetrading.com z January 2012 z Asia etrader

45

““Because post-trade fees are often correlated with the number of tickets, if we do nothing as an industry, it will cost us more to process the same value of trades,” – Robert Barnes, CEO of UBS MTF”

46

post trade

by to connect, using extra margin held within Clearstream, the central securities depository, to provide security. Margins are calculated on a monthly basis or daily basis, depending on the clearing house.

This model has been implemented by multilateral trading facilities (MTFs) BATS Europe and Turquoise, whilst MTF Chi-X Europe plans to offer interoperability from 2012.

“The CCP user choice model in Europe will have a higher probability of success in Asia, rather than having to impose on people to switch to one market infrastructure,” he said.

By linking local clearing houses, as has happened in Europe, a firm with multiple fills on different trading platforms would receive one net settlement message from the clearing house.

Shares can be settled in their home market, which should reassure regulators concerned about currency movement. Allowing connection to international clearing houses such as LCH. Clearnet and SIX x-clear would also create real economies of scale.

“As Asia may also evolve with more platforms trading the same stock name, it makes more sense to introduce a model were on a per firm basis you could select a clearing house of choice,” he added.

Fly in the ointment As good as this looks on paper, there are a number of barriers to be overcome, says Tony Freeman, executive director of industry relations, EMEA & Asia-Pacific at Omgeo, the post-trade solutions provider.

“The countries in the region have no formal mechanism to get together, in the way that the European Union operates, and they are hardwired to compete against each other,” he said. “The risk issues around clearing mean that regulators prefer to have their own local organisation.”

Wayne Eagle, director of EquityClear, LCH. Clearnet’s equity business, agrees, noting that there are no precedents in Asia for the regulatory underpinnings of interoperability.

“Interoperability in Europe starts life as an English law contract between two CCPs; in Asia, the national law under which the contract would be executed would have to be considered,” he noted. “Another difference in Europe has been introduction of MiFID, which swept away the national concentration rules.”

However, Aitken believes there is a shadow hanging over the markets which may prove to be a catalyst for change.

“If the NYSE Euronext and Deutsche Boerse merger goes ahead, the resistance to international mergers will disappear overnight,” he said. “But big cross-border mergers scare the regulators; they would apply pressure to break up the businesses into their component parts. That will create momentum for international clearing and Asia won’t be able to resist, it will join or be left behind.”

Eagle concedes that the there is potential for competition “at some point in the future” but added, “It is important to remember the time it has taken in Europe to get where we are today.”

“Just as there are clearers operating across Europe, it’s time to have conversations with markets in Asia.”

Tal Cohen, CEO of Chi-X Global”

Asia Etrader z January 2012 z www.asiaetrading.com

technology

47

India’s Exchange Empanelment Empanelled Vendors in India Company

BSE NSE

3i Infotech Technologies Ltd

Yes Yes

Dion Global Solutions Ltd

Yes

DOTEX International Ltd Yes Financial Technologies (India) Ltd

Yes Yes

Geojit Technologies Pvt. Ltd

Yes Yes

Greeksoft Technologies Pvt. Ltd

Yes Yes

Marketplace Technologies Pvt. Ltd Yes Yes

IML server is where the API (known as the Open Message Bus) maps the messages from the trading application to the exchange matching engine. Proprietary messages sent from the member via the third party trading application into the IML server are first decrypted then encrypted in between the IML and Central Trading Engine. Interestingly, the Intermediate Message Layer can also be used for integrating back-office solutions too.

Before submitting the software for exchange approval the following testing must have been previously completed:

Multitrade Softech Pvt. Ltd Yes

• Three IML IDs sending an order simultaneously

Net Equity Technologies Ltd Yes

• Load balancing between a large numbers of IML IDs

NSE.IT Ltd

Yes Yes

Omnesys Technologies Pvt. Ltd

Yes Yes

Reliable Software Systems Pvt. Limited Yes

• Failover of IML IDs • Call Auction functionality • Handling of FCAST, NFCAST and ECAST • Fast Communication Server ready

Saudi National Technology Group Company Ltd Yes

• Order throughput regulating to the IML

SunGard Solutions (India ) Pvt. Ltd Yes

• Order reconciliation

Tata Consultancy Services Ltd

Yes Yes

Once development and testing of the trading application whether in-house or third Techspan India Ltd Yes party is believed to be complete the BSE XtremSoft Pvt. Ltd Yes then requires a detailed explanation of the software. For example, the different components that have been built or he electronic trading phenomenon develops the trading application in-house customized, what they do and whether or not that swept the world in the 90s solely for the use of its own dealing desk they will interface with the IML. Also, a list of revolutionized investing and ushered or proprietary trading desk. The in-house configuration parameters and descriptions, in new challenges and opportunities. development team may be the broker’s own their purpose and recommended values India was no exception. In 2000, the capital developers or they may use a third party must be submitted. Other important markets regulator SEBI and the major to manage the custom development. The details such as how do orders route to the exchanges began formulating guidelines broker may also provide front end trading exchange, how trades are mapped to the and policies for the empanelment of trading screens to its clients as either thin or thick IML ID, details of how load balancing is systems that were either developed in- clients. The Reselling category allows achieved and how trade confirmations house at the member’s firm or through a 3rd for empanelling with a third party vendor are handled. Further minutiae including party independent software vendor (ISV). such as Symphony Tech or Financial message sequencing management and Trading software empanelment in India is Technologies who has either been previously what happens when messaging is out of akin to exchange conformance testing approved by the exchange or is seeking sync must also be divulged. In cases where anywhere else except it is much more their first approval and plans to sell software the system crashes or fails details of how expensive and disclosure requirements are licenses to multiple customers. the order book and trade blotter are rebuilt. far more extensive.

Testing at the BSE is done through the How are trading IDs mapped and when Vendor empanelment at the BSE falls Intermediate Message Layer (IML) and is the are they passed to the IML, how are under two categories i) Self Use and ii) interface between the trading application and trading audits performed and what Reselling. Under Self Use the member the exchange’s Central Trading Engine. The types of broadcasting technology is

T

www.asiaetrading.com z January 2012 z Asia Etrader

48

tecHnoLoGy

“Vendors must pay rather large fees for empanelment which does not support the development of ISVs and impacts overall trading.”

used and supported are further required disclosure. Additionally, the exchange wants to see a user manual, installation guide, a troubleshooting manual, a map showing the trading flows and logic with descriptions and a network connectivity diagram.

There are further disclosures required if you are a vendor selling your trading platform under the Reselling category. Like the NSE, there is a relatively high cost to vendors who fall under the reseller category.

BSE and NSE Empanelment Fees Self Use Empanelment Charges Registration Fees : Rs 150,000 (~2700USD) Recurring Annual Service Contract: Rs. 50,000 (~900USD) Reselling Vendor Empanelment Charges Registration Fees: Rs. 1,000,000 (~19,000USD) Recurring Annual Maintenance Charges: Rs. 250,000 (~4700USD)

The National Stock Exchange of India (NSE) requires vendors to empanel their trading software via the exchange’s Computer-toComputer Link (CTCL). The CTCL is itself a program that provides a single point of access to both the equity and derivatives market on the NSE trading system (NEAT). Much like the BSE, brokers can declare themselves to be empanelling an in-house application which the broker is building or to a third party software vendor they have paid a licensing fee to. ISVs must be introduced by a trading member who has previously acquired the exchange’s APIs and, additionally, foreign ISVs must have an office in India. The vendor can only apply for empanelment after the software application the introducing member intends to use is approved.

After the NSE OKs the application the member then can begin using the trading software. At present there are some 345 Capital Markets

brokers permitted for electronic trading in India.

Vendors, too, must pay rather large fees for empanelment to the Exchange. This unfortunately does not support the development of ISVs and, in turn, impacts overall trading. The one-time fee includes the library of message formats and protocols.

Some of the vendors empanelled with NSE include Omnesys Technologies, in which the exchange itself holds a 26 per cent stake through a subsidiary, Financial Technologies India, which is NSE’s rival in the currency derivatives segment and Religare Techno Global Services.

(See list of empanelled vendors below) Rigorous security measures must be built within the trading application such as User IDs, first level passwords, automatic password expiration, audit facilities that include unique numbering of orders and trades, a firewall between the member and exchange and Secured Socket Layer (SSL) for internet based-trading.

In April 2008 DMA finally became a reality in India and with it further rules governing application requirements were added. Trading members providing DMA are required to populate every order emanating from their OMS/ EMS with a 15 digit tag. The first 12 digits are the Order ID. The 13th digit will either be a 1 or a 0 ‘zero’. Zero indicates the order originated from an algorithm and One from a non-algorithmic order such as a click trader or an order that is received over the phone and entered by the brokers trading desk. The 14th and 15th digit will be 00 indicating the trading platform is a broker in house application.

From July 2011, in an effort to address concerns by the members to reduce empanelment approval times (typically more than 4 weeks) the NSE introduced an online application through the ENIT (Electronic NSE Interface for Trading Members) system.

Certainly, the regulator and exchanges are worried about “Algo’s Going Wild” and protecting the integrity of their capital markets and a thorough testing regime, from any exchange, makes sense. However, the burdensome disclosures incumbent upon

software vendors who wish to setup shop in India not to mention the out-of-pocket cost are stifling development of trading platforms and tools squeezing out small firms leaving larger, better capitalized players to reap the benefits.

Asia etrader z January 2012 z www.asiaetrading.com

back page

49

Asia’s eTrading Industry Career Board

www.asiaeheads.com

T

he 2011 electronic trading jobs market has been strong across Asia as international and regional firms beef up sales, technology and services to the industry.

We are seeing some weakness in the brokerage space in Hong Kong and Singapore as lower markets are squeezing commission dollars and forcing these firms to cut heads. High rents aren’t helping the bottom line either. If the regional giant China does indeed suffer an economic slowdown next year then this will affect the whole regional particularly Hong Kong and Singapore with the former’s market performance being highly correlated to the mainland. We are seeing continued investment from vendors setting up and expanding regional headquarters particularly in these two markets, however. There is a large demand for sales with ISVs and technology vendors paying top dollar for candidates.

In Japan, with the exchanges investing to improve trading in the secondary market and increasing service levels we see hiring across most segments of the electronic trading vertical. More machine driven trading will take place in both the equity and derivative segments as the markets now favor this kind of trading. To support these clients, brokers

will be ramping up staff, technology and support in that country.

Similarly in Australia, while the market there has been soft the entrance of Chi-X should see the execution pie grow and increase trading in that venue. Algorithmic trading will continue to grow and those clients will need to be supported and have the tools to trade.

Korea should be adding heads in its etrading industry as firms position themselves for the announced regulatory overhaul that promises greater competition and the development of its investment banks.

On a final note, MF Global’s bankruptcy added many highly skilled workers to the industry’s unemployment numbers across Asia.

Unemployment Oct 2011 Australia – 5.2% Hong Kong – 3.2% Japan – 4.5% Korea – 3.2% Singapore – 2.0% Taiwan – 4.3%

Role

Company

City

Contact Email

Director of Sales for APAC

OneMarketData LLC

Hong Kong

Richard Chmiel

richard.chmiel@onetick.com

Tradebook Sales Representative

Bloomberg

Hong Kong

Jill Fleming

jfleming39@bloomberg.net

Asia Pacific Regional Head of Private Banking Technology – MD level

Realtime Resourcing Asia Pacific

Singapore

Barry

Barry@realtimeresourcing.com

Single Stock development Lead APAC

Realtime Resourcing Asia Pacific

Hong Kong

Barry

Barry@realtimeresourcing.com

Pre-Sales Engineer Ultra Messaging

Informatica – Ultra Messaging

Hong Kong

Daniel Clarke

daclarke@informatica.com

Business Manager

City Executive Consultants

Tokyo

Miles Nicholls

miles @cityexec.co.uk

Senior Electronic Trading Sales

City Executive Consultants

Hong Kong

Miles Nicholls

miles @cityexec.co.uk

Electronic Trading Support

Carrington Fox Asia

Hong Kong

Mr. Wang

k.wang@carringtonfox.com

Quantitative Researcher

Carrington Fox Asia

Singapore

Mr. Wang

k.wang@carringtonfox.com

Senior Futures & Options Execution Broker(s)

Aimselect Global Markets Limited

United Kingdom

Andy Slater

andy.slater@aimselect.com

Junior Quantitative Trader

Matthew Hoyle Financial Markets

Hong Kong

Benny Kwan

benny.kwan@matthewhoyle.com.hk

Algorithmic Trading Quant

Matthew Hoyle Financial Markets

Hong Kong

Benny Kwan

benny.kwan@matthewhoyle.com.hk

Quant Research focusing in Futures HFT

Matthew Hoyle Financial Markets

Singapore

Benny Kwan

benny.kwan@matthewhoyle.com.hk

www.asiaetrading.com z January 2012 z Asia Etrader

50

back page

Dates Date

Event

Where Type

January 31

Trading Architecture Japan

Tokyo

Conference

February 7-8

TradeTech India

Mumbai

Conference

February 10

Asian Market Integration and Financial Innovation

Tokyo

Conference

February 11

Finance and Investment Expo of 2012

Singapore

Conference

February 28

Asia Etrading Forum OTC in Singapore

Singapore

Networking

March 1

Asia Etrading Forum OTC in Hong Kong

Hong Kong

Networking

March 7

Emerging Markets Overview

Internet

Webinar

March 13

TradeTech Australia

Sydney

Conference

March 20-21

2nd Annual Custody, Clearing and Settlement Asia 2012

Hong Kong

Conference

April 18-19

TradeTech China

Shanhai

Conference

April 24

TradeTech Emerging Markets

London

Conference

Date

Country Holiday

Date

Country Holiday

January 19-27

Taiwan

Chinese New Year

April 4

Taiwan

Ching Ming Festival

January 23

Indonesia

Chinese New Year

April 5

China

Ching Ming Festival

January 23-24

Korea

Seollal Holiday

April 5

India

Mahavir Jayanthi

January 23-24

Malaysia

Chinese New Year

April 5

Philippines

Maundy Thursday

January 23-24

Vietnam

Lunar New Year

April 6

Australia

Good Friday

January 23-27

China

Chinese New Year

April 6

China

Ching Ming Festival

January 23-24

Hong Kong

Chinese New Year

April 6

Hong Kong

Good Friday

January 26

Australia

Australia Day

April 6

India

Good Friday

January 26

India

Republic Day

April 6

Indonesia

Good Friday

February 1

Malaysia

Federal Territory Day

April 6

New Zealand

Good Friday

February 6

Malaysia

Birthday of Prophet Muhammad

April 6

Philippines

Good Friday

February 6

New Zealand

Waitangi Day

April 6

Singapore

Good Friday

February 11

Japan

National Foundation Day

April 9

Australia

Easter Monday

February 20

India

Maha Shivratri

April 9

Hong Kong

Easter Monday

February 27-28

Taiwan

Peace Memorial Day

April 9

New Zealand

Easter Monday

March 1

Korea

March 1st Movement

April 9

Philippines

Easter Monday

March 7

Thailand

Maka Bucha Day

April 11

Korea

National Assembly Election

March 8

India Holi

April 11-16

Thailand

Songkran Holiday

March 20

Japan

Vernal Equinox

April 25

Australia

ANZAC Day

March 23

Indonesia

Hindu Saka New Year

April 30

Japan

Showa Day

April 2

Vietnam

Hung King Festival

April 30

Vietnam

Reunification Day

April 4

Hong Kong

Ching Ming Festival

Asia Etrader z January 2012 z www.asiaetrading.com

BAcK pAGe

51

DIRECTORY CQG

IPC

CQG remains headquartered in Colorado, where we were founded in 1980. We have more than 450 employees worldwide, with sales and customer support offices in Chicago, New York, Denver, Glenwood Springs, London, Frankfurt, Tokyo, Sydney, Singapore, Moscow, and throughout Eastern Europe. CQG provides market data and ISV services in more than 65 countries. www.CQG.com Sales & Support: +61 (2) 9235-2009

IPCís market-leading offerings include the first unified communications/application platform, award-winning hard and soft turrets, electronic connectivity services including enhanced voice services, business continuity solutions, and followthe-sun service and support. IPCís global reach extends to more than 58 countries ñ including a Financial Extranet of 4,000 on-net locations in over 700 cities and more than 115,000 turrets deployed worldwide. Headquartered in Jersey City, New Jersey, IPC has approximately 1,000 employees located throughout the Americas and the EMEA and Asia-Pacific regions.

For more information, visit www.ipc.com. Tel: +852.2899.8000 Email: info@ipc.com

Equinix Equinix, Inc. connects businesses with partners and customers around the world through a global platform of high performance data centers, containing dynamic ecosystems and the broadest choice of networks. Platform Equinix connects more than 4,000 enterprises, cloud, digital content and financial companies including more than 680 network service providers to help them grow their businesses, improve application performance and protect their vital digital assets.

Equinix operates in 38 strategic markets across the Americas, EMEA and Asia-Pacific and continually invests in expanding its platform to power customer growth http://www.equinix.com

Fidessa Fidessa is a global business with scale, resilience, ambition and expertise. We’ve delivered around 30% compound growth since our stock market listing in 1997 and we’re recognised as the thought leader in our space. We set the benchmark with our unrivalled set of mission-critical products and services and, uniquely, serve both the buy-side and sell-side communities. Ongoing investment in our leadingedge, integrated solutions ensures Fidessa remains the industry’s number one choice.

Tel: +852 2500 9500 Email: ap.info@fidessa.com www.Fidessa.com

Instinet A Nomura Group company, Instinet is an electronic trading pioneer, having established the world’s first major electronic trading venue in 1969, one of the first recognized U.S. ECNs in 1997 and Chi-X Global, in which it remains the majority shareholder.

Through its subsidiaries, Instinet acts as a global agency-only broker, helping institutions lower overall trading costs and improve investment performance through an advanced suite of electronic trading tools, sales and portfolio trading, commission management services and access to independent research.

Tel:+852 2585 0500

www.asiaetrading.com z January 2012 z Asia etrader

OneMarketData OneMarketData is a leading provider of enterprise tick data solutions for financial institutions worldwide. OneTickô, its flagship product, is a comprehensive business solution designed to fully address the marketís need for intraday data collection, archiving, retrieval, and analytics across a wide spectrum of users from various departments. The OneTick Platform includes highperformance OneTick Archive and In-Memory Databases, OneTick Event Processing Engine, OneTick Analytics, and a wide array of Adapters to standard sources of historical and real-time tick data. Conceived to specifically address the requirements of the financial sector, OneTickís architecture and extensive built-in domain expertise offers low integration and operation costs, and fast deployment.

More information about OneMarketData is available at www.onetick.com

True Partner Education True Partner Education is a group of seasoned financial professionals who are still actively trading, but also enjoy sharing their ample experience with other market participants and persons who are eager to pursue a career in finance (by providing undergraduate and MBA programs at leading Asian universities).

By providing actual trading cases and with course participants applying strategies using real-time market data in our University Trading Laboratories in Hong Kong and Taiwan, we are able to teach knowledge well beyond the theory that is commonly taught in this field. True Partner Education is an affiliate of True Partner Holding Ltd. www.truepartner.hk info@tpedu.hk +852 2109 4044

Would you like to be included the Asia Etrader Directory? Contact support@asiaetrading.com for details.

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LAUNCH YOUR

GLOBAL TRADING CLOUD IT’S FAST, EASY, AND SCALABLE

EXPLOSIVE GROWTH IN TRADING VOLUME

The growth of derivatives contracts traded globally has set record highs.

Trading firms are demanding fast and reliable connections to worldwide markets. CQG, which connects to over one hundred market data sources and more than forty for electronic trading, provides the connectivity needed for Asia and beyond.

NORTH AMERICA

EUROPE

15%

ASIA

42%

13% LATIN AMERICA

50% Percentage change of global listed derivatives volume by region. Source: FIA Annual Volume Report 2010; figures rounded to the nearest whole number.

CQG’S SUPERIOR PERFORMANCE, RELIABILITY, AND SPEED

200%

TICK VOLUME

300%

PEAK DATA LOAD

400%

An integrated trading, analytics, and data platform, CQG keeps up with the global trends. Our Hosted DMA solution makes implementation easy, fast, and inexpensive. Over the last five years CQG’s performance has improved to stay ahead of the curve.

3.5X

FASTER DATA DELIVERY

ORDER ROUTING VOLUME Source: CQG Performance Data, 2007-2011

Find out more at www.cqg.com/growth