Algo Trading Takes Strides in Asia
June 2, 2008
Improved market infrastructure and increased buy-side demand have put electronic trading at the top of the agenda in the Asia-Pacific markets. Until recently, electronic trading faced significant structural and regulatory obstacles to widespread adoption in the region.
The lack of a common set of regulations has been the largest impediment to electronic trading's growth in the region. While the European Union and U.S. have the Markets in Financial Instruments Directive and Regulation NMS, respectively, Asia-Pacific countries still impose differing regulations, standards and conventions.
For example, prior to 2005, regulators at the Hong Kong Exchanges & Clearing (HKEx) maintained unusually wide spreads--almost 50 basis points (bps), third in the region behind Singapore's 61 bps and Thailand's 72 bps. As a result, algorithmic execution quality on HKEx was relatively poor, particularly for standard algorithms such as volume-weighted average price (VWAP), given the high correlation between algorithmic performance and a stock's average spread.
In addition, these markets rely on varying levels of technical sophistication. The region has suffered from several technology mishaps in the past few years, including one in which the Tokyo Stock Exchange (TSE) saw a surge in trade volumes that forced it to shut down. Furthermore, progress in electronic trading was slowed by the lack of a local network infrastructure that could address the low-latency requirements of electronic trading. Local firms subscribing to Asian data feeds faced substantial delays in receiving market data--an obvious problem for firms wishing to trade electronically.
Electronic trading in Asia-Pacific is evolving rapidly, driven by increased demand from the buy side. In response, brokers have significantly upgraded their e-trading capabilities, rolling out a variety of algorithms that take into account each market's structural and regulatory characteristics. The sell side has been able to rapidly deploy such algorithms by adapting solutions and execution strategies previously designed for the U.S. and EU markets.
Brokers have also put pressure on exchanges to adopt new technology in support of algorithmic execution. For the most part, exchanges are responding, as shown by TSE, which is rolling out a new trading platform in 2009, and the Singapore Exchange (SGX), which has worked with Nasdaq OMX Group on integrating new direct-market access technology aimed at buy-side firms.
HKEx reduced spreads for stocks over HK$50 in 2005, setting the tone for the Asian market and certainly influencing SGX's operations. The results were immediate: According to Credit Suisse, in the months after HKEx introduced its new pricing guidelines, the average performance for a VWAP algorithm for stocks with reduced spreads increased from -9 bps to -1.8 bps.
Data Latency
On another front, exchanges and data providers are working to reduce the issues related to data transmission latency. As an example, Reuters recently teamed with BT Radianz to sift market data through nearby hubs, creating a smaller "hop" between exchanges and end users. SGX, meanwhile, has partnered with Reuters to deliver collation services to brokers at the exchange's regional data centers.
The growth of electronic trading in Asia-Pacific is documented by analyst estimates and broker data. Research firm Aite Group predicts that e-trading as a percentage of all order flow will quadruple between now and 2010. And according to Goldman Sachs, the value of client-driven orders for Japanese stocks executed with algorithms more than tripled in 2007, while the rest of the Asian markets saw a sixfold increase in algorithmic trading.
