The Market structure debate in Asian context

The recent debate about the impact of High Frequency Trading (HFT) and on the issue of market structure in general is no more confined within the US market. Regulators and market participants worldwide are discussing this issue seriously. The chairman of the Australian Securities and Investment Commission (ASIC) recently detailed the position of the Australian authorities in this regard. Incidentally Australia, along with Japan, is one of the few Asian countries that have multiple trading venues, a necessary condition for the growth of advanced trading and order routing capabilities, including HFT. It is worthwhile to look at the state of adoption of the Asian region in terms of adoption of advanced trading tools, and the role of the Asian exchanges in that regard. The different Asian markets are at different levels of maturity, and therefore it is difficult to analyse the region as a single homogenous entity; rather the Asian markets can be grouped into two broad categories. The first category belongs to the advanced economies like Australia, Hong Kong, Japan and Singapore which have well developed capital markets. Exchanges in these countries are at par with western competitors in terms of latency and adoption of advanced trading technologies. The second category consists of exchanges in emerging economies like India, China, Malaysia, Korea which are somewhat lagging their Asian counterparts in the first category. However, there is a common factor that runs across the two categories of exchanges – lack of competition from alternative trading venues. This means that most of the Asian exchanges are largely national monopolies without significant competition from alternative providers, though the situation is slowly changing in some markets (e.g., Australia, Japan). This is one aspect which distinguishes Asia from the western markets where the competition among exchanges and alternative trading venues is severe. Another key challenge in Asia is the fragmentation of markets and lack of harmonization – regulatory, economic, monetary and technological – in trading and settlement practices. This restricts the growth of cross border trading volumes and greater regional integration at an Asian level. The ASEAN initiative is a move in that direction, but it is still early days to judge its potential for achieving regional integration. Asia has also lagged the western markets in terms of adoption of advanced trading tools and technologies (like DMA, algorithmic trading, high frequency trading etc). Some of the Asian exchanges, particularly the ones in the advanced economies, have adopted latest technologies with low latency and colocation offerings, but some of the above mentioned factors still present challenges. For example, lack of multiple trading venues limits arbitrage opportunities. Lack of regional integration means cross border flows have yet to realize its full potential. These prevent growth of trading volumes, need for advanced trading tools and technologies, and participation of foreign players in domestic markets. Regulators in Asia are traditionally very conservative. Therefore decision making for significant changes in market structure and practices takes time. In a rapidly evolving trading world, this means Asian exchanges find hard to stay abreast with global trends. Also because domestic exchanges are perceived more as national utilities, any proposal that threatens the position of incumbent exchanges is met with resistance and difficult to implement. Some of the Asian exchanges have been very aggressive in exploring newer avenues beyond the traditional revenue sources. The Singapore exchange is a good example of that. It started offering clearing services for commodity derivatives through its AsiaClear offering a few years ago. In addition to providing CCP services as mandated for OTC derivatives under the proposed reforms, the SGX is collaborating with the Korea Exchange to develop the latters’ OTC clearing capabilities. Therefore in some markets (like Singapore) the incumbent exchanges are taking a leading role in clearing of OTC derivatives as proposed by new regulations. It will be interesting to see if new players will be able to enter and succeed in this business. Low volumes in the Asian markets, proliferation of CCPs, and competition from international ones may result in each CCP specializing in specific niches along product lines or local currency instruments.

Exchange initiatives in Asia

In a recent post we discussed that OTC derivative market reform process is giving rise to new opportunities for several market participants. We identified provision of collateral management services as one such opportunity. It comes as no surprise that the Singapore exchange and Clearstream are partnering to offer precisely such service. This development also highlights another trend that has been observed for some time now – that of partnership and alliances in the exchange landscape, particularly in Asia. Even though the Singapore Exchange (SGX) failed in its bid to take over the Australian Stock Exchange, it has been very active in forging partnerships and alliances with other exchanges, both in the region and globally. Recently it bought a controlling stake in the clearing house LCH.Clearnet. It also partnered with the London Stock Exchange to provide investors in each country the opportunity to invest in the most actively traded stocks on the other’s exchange. It has similar partnership for cross trading of certain products with other exchanges like the National Stock Exchange of India. The exchange has increased the trading hours to accommodate such collaborative initiatives with other exchanges. Besides partnering with other exchanges, it is also adding new services to expand vertically. The exchange started offering clearing services for commodity derivatives through its AsiaClear offering a few years ago. In addition to providing CCP services as mandated for OTC derivatives under the proposed reforms, the SGX is collaborating with the Korea Exchange to develop the latters’ OTC clearing capabilities. Going beyond traditional partnerships with other exchanges, the SGX partnered with Chi-X to offer a dark-pool platform to the investors in the region. Even though that initiative did not meet with much success in terms of attracting volume, it displayed the exchange’s intention to explore newer opportunities. The SGX is one of the four exchanges to join the ASEAN trading link, an initiative  that offers a common link to investors in the seven ASEAN bloc countries to trade in other member countries. In addition it is looking for organic growth by adding product base and improving distribution services (e.g., developing Chinese Yuan capabilities). Not to be left far behind, the Hong Kong Exchange has acquired the London Metal Exchange. Regulators in Malaysia have allowed CME to buy a 25% stake in the Bursa Malaysia’s derivative business and revamp its technology. In Japan the Osaka Securities Exchange merged with the Tokyo Stock Exchange to make it the third largest exchange by market capitalisation. These developments show that the exchanges in Asia have been very active in forging new partnerships and broaden their suite of offerings. The trend is expected to continue in the future.

Tokyo Roundtable 2013: The Capital Markets Revolution in Japan and Asia

Tokyo, home to Asia’s largest capital markets, is also wonderful in May, and was a perfect location for two recent Celent roundtables.

The first was Exchange Panel: Drivers of Innovation and a Market in Transition. We invited Executives from five major global exchanges; CME Group, JPX Group, Korea Exchange, NYSE Euronext, and Singapore Exchange Limited. Representatives from both Asian and global exchanges discussed changing equities derivatives market structures, business models, challenges, and opportunities in Japan’s and Asia’s capital markets.

Though similar at first glance, the exchanges from the East and West presented a marked contrast. Asian exchanges insisted that competition, diversity, and deregulation are the keys to growth. Exchanges based in Europe and the United States said they found the diversity and competition excessive; they would prefer order and market discipline. All exchanges stressed the importance of innovation and collaboration, and all agreed the distinction between investment and speculation is important.

Such differences between East and West reflect the history of the global exchange business. Differences in time and distance are shrinking as networks grow, but, ironically, the advent of global capital markets has led investors to recognize the importance of individual trading venues.

For the second roundtable, The Capital Markets Revolution in Japan and Asia, we invited the top players. From online securities companies, Monex, Inc., from buy-side, Nissay Asset Management Corporation, and from sell-side, Nomura Securities Co., Ltd. This session focused on the emerging low latency landscape and the opportunities and challenges in the region’s equities and derivatives markets. In Japan and Asia, since the introduction of arrowhead, the latency has been lowered enough and the attention has shifted to its execution quality. Technologies such as Big Data and transaction cost analysis (TCA) are the focus of their challenges.

Finally, in response to questions from audience of the venue, we asked the panelist to comment on high frequency trading (HFT). There were two comments; one was “the opportunity to get everyone used to HFT is here”, and another “HFT is welcome in Japan”.

The market environment has changed drastically. Conversion of monetary policy, “Abenomics,” and the “three arrows” were a volcanic combination. Magma flowed, but all indicators began to rise.

FIG 1:Tokyo Equities Market last six months

Tokyo Roundtable 2013_GraphSource: NIKKEI, Celent
These discussions will continue in New York in June. Celent will continue to explore the market trends of tomorrow. We are looking forward to meeting you again.

Indian exchanges prepare for greater competition

The Indian capital markets regulator, SEBI, is talking reforms as it recently announced a blueprint that is potentially set to increase competition among exchanges. The regulator’s stance on increasing competition and allowing foreign investment in exchanges was closely anticipated in recent months, especially among large global banks. SEBI had to address pressing concerns on attracting foreign investment (Figure indicates the drastic fall in FII inflows into India in 2011) and failing to keep pace with developments in global capital markets. The new move by SEBI has cleared the way for listing of stock exchanges. This decision comes after an expert committee headed by former Reserve Bank Governor Bimal Jalan submitted its report in 2010 on governance and ownership issues relating to market infrastructure institutions. While SEBI has broadly accepted the recommendations, it has gone ahead with the move to allow public listing of exchanges despite the committee recommending against such a move on ‘conflict of interest’ grounds. The blueprint indicates that public holding of exchanges should be at least 51%, while exchange operator, banks and insurance companies are allowed to hold up to 15%. Foreign investors are allowed to hold up to 5%. Exchange operators, however, would not be allowed to list on their own exchanges. SEBI is watching developments in global capital markets closely. The developed markets in US and Europe are far ahead in terms of maturity of market infrastructure, while India is yet to reach a stage where alternative trading venues can compete with incumbent exchanges. The NSE started in 1994 to compete with the then singly dominant exchange, BSE. But ironically the NSE has today itself become what it set out to defeat, accounting for close to 75% of equity volumes. The attention is on regional exchanges to play more aggressively. With an intention to infuse more competition, the regulator has warned that dormant exchanges that are not attracting liquidity would have to be wound up. SEBI has stipulated a minimum annual trading volume of INR 1000 crores for exchanges to continue operating and the same would be reviewed after 3 years. While we see it as a timely warning bell, it is not enough. We have to wait and see how SEBI looks to empower and encourage regional exchanges. The Delhi Stock Exchange has already woken up to the competition by following in the footsteps of LSE in upgrading its IT infrastructure by partnering with MilleniumIT, a technology player which provides ultra-low latency trading solutions. The debate in ongoing in the case of clearing houses and the regulator is expected to come out with its view soon on having a single clearing house versus introducing interoperability. Although it appears that policy challenges facing SEBI are similar to those faced by regulators in developed markets in the past, and despite indications that SEBI is trying to align with developed markets, we should be careful while concluding that the Indian regulator would eventually follow in the footsteps of US and Europe.

Recent Developments in the Australian Capital Markets

Capital markets worldwide have undergone radical transformation over the last decade with heightened competition among the stock exchanges. This has mostly been a US-Europe phenomenon with the Asian exchanges landscape being dominated by national exchanges. However, the situation is slowly changing. Recently Australia undertook initiatives towards making its securities market more competitive by breaking the monopoly enjoyed by the Australian Securities Exchange (ASX). Till now the ASX was responsible for surveillance of trading activity in Australia; but according to a new legislation, the Australian Securities and Investments Commission (ASIC) will now take over the supervisor role from ASX. This decision, which took over two years’ assessment and deliberation, was necessary to allow new competitors of ASX to enter and access the securities market. As a result, Chi-X Australia has already received an approval from the government and will possibly be the first player to enter into this evolving market. A US institutional broker Liquidnet and a New Zealand Stock Exchange backed platform are also seeking licenses to operate in the Australian market. Amidst this evolution, ASX has taken a number of initiatives to meet the new challenges of a competitive environment and maintain its stronghold in the market. Recently it consulted with a broad range of market participants, end-users, vendors as well as regulators to improve its service offerings. Besides deciding to slash its main trading fees the ASX is planning to launch three new trading platforms by 2011, each targeted at different customer segment. VolumeMatch, a block matching facility that allows matching of orders anonymously, is targeted towards sell side players. TradeMatch, an ultra-low latency, high capacity, trading platform that will provide a full functionality trade execution for all ASX-quoted securities, is scheduled to be launched in November, 2010. Third is PureMatch, an adjacent ultra-low latency execution facility for the top 200 ASX listed securities. It is targeted at high frequency traders and scheduled for release in early 2011. These developments can be potential game changers in the Australian context. They can also bring major changes in other Asian countries as regulators in the region will be keeping a close eye on Australia.