If any country epitomizes the wilder side of capital markets trading in Asia, it’s Malaysia. But there are signs that Malaysia is ripe for a bit of refinement, which would give this dynamic country the focus it needs to be more competitive in global markets.

On the upside, there are many growth opportunities and a lot of energy to be found in Malaysia. The more relaxed regulatory environment is a striking contrast to the more mature markets of Europe and North America. It’s also a market where major brokers are consolidating to get ready for the next stage of Malaysia’s national evolution. On the other hand, the country’s tendency toward a more free-for-all spirit can sometimes be seen as a challenge.

A case-in-point is the challenge facing the Bursa Malaysia as it attempts to move its members to a new trading platform. The exchange is slated to decommission its incumbent legacy trading platform and 8,000 terminals in use by exchange members by the end of 2012. Not only has the expiration date of the system been changed at the behest of members, but an effort to involve more external suppliers has unraveled as the exchange’s members have not selected a single supplier or set of suppliers that will provide access to the exchange’s new system. This has occurred in an environment that has less regulation and is governed by a great sensitivity to the price tag for any new trading technology, making for a very competitive environment for suppliers.

Despite the growing pains, major brokers in Malaysia are seeing the need to combine forces to become more powerful regional and global players. Even established Malaysian firms are reaching out beyond borders to improve their profile in the region. For instance, the CIMB Group Holdings of Malaysia, a commercial bank that offers investment banking, announced in early April that it will buy the Asian equities business of the Royal Bank of Scotland Group (RBS) for £88.4 million ($142.7 million).

Malaysia is also reaching out on the derivatives front. Bursa Malaysia has had a strategic agreement with the CME Group since 2009, with the partnership making contracts available through the electronic trading platform CME Globex. This synergy is an ambitious attempt to expand the Malaysian derivatives market and the effort has been gaining ground.

Yet it is equities that seem to hold the greatest promise. Malaysia is working to make Bursa Malaysia much more connected to other Asian exchanges to facilitate cross-border trading and thus attract more international investors. Bursa Malaysia and the Singapore Exchange are slated to inaugurate their connection by June. This is the first move in a much larger effort to create electronic trading connections among many Asian exchanges. The Bursa Malaysia-Singapore link will coincide with a summer launch for the highly touted ASEAN Trading Link, an initiative of the Association of South East Asian Nations dedicated to paving the way for an economic pact that parallels the European Union.

With so much happening in Malaysia, trading software and services providers face an ever-growing list of requirements from market participants that want to keep up with the rapid rate of change. All suppliers will have to offer products, features and support that go far beyond meeting local and regional mandates. They must offer the innovative capabilities, partnerships and technical support required for achieving global reach, thus guaranteeing customers a path for growth. This is essential, as Malaysia is one market that is not going to rest on its laurels.

While you’re here…

• See commentary from our recent SunGard Industry Seminar in Kuala Lumpur.
• Read additional articles about trends and challenges in global markets.

This blog post originally appeared on TabbFORUM.

The trading landscape in Asia Pacific is becoming more fragmented and regulated. Competition in Asia Pacific will increase, both among Western peers or within the region, as firms bid to provide the highest quality services to clients without incurring unnecessary costs. These forces are shaping the market landscape, as are the following 10 trends, which I have grouped under the themes of transparency, efficiency and networks:

Transparency:

1. To better control counterparty risk, Asian hedge funds are diversifying their broker relationships by adopting a multi-prime broker model.
2. Regulations that are designed to increase transparency will initially increase costs and discourage sell-side firms from trading over-the-counter (OTC) derivatives in favor of the listed market. However, those who continue to trade OTC derivatives will start to see the benefits of reform-driven risk management, reporting, and efficiency in 2012.
3. In contrast, buy-side firms are combining their listed derivatives operations with their OTC businesses in an effort to streamline their operations without adversely affecting their complex valuation platforms.
4. As strict regulations are imposed, local exchanges, including the Hong Kong Stock Exchange and Singapore Exchange, will continue towards the implementation of central counterparty (CCP) clearing houses in a bid to manage and reduce counterparty, systemic and default risk.

Efficiency:

1. The buy side will seek direct market access as more and more Asian investors look to lower their transaction costs by trading electronically rather than over the telephone.
2. The growing demand from the buy side will drive broker-dealers to seek electronic trading solutions that help them manage and control their risk.
3. High-frequency trading will increase as firms and exchanges deploy low latency trading infrastructures. Exchanges will compete among themselves to become highly liquid trading hubs. Japan, Australia, and India have already adopted the low-latency infrastructure and have witnessed double-digit growth in HFT participation. In 2011, the Singapore Exchange announced the launch of the SGX Reach trading engine. The Southeast Asian bourses are likely to also explore partnerships with markets in other geographies.
4. While algorithmic trading has been adopted in many markets, especially the major money centers of Hong Kong, Singapore, Australia and Japan, it is unlikely to reach the same levels seen in western markets due to an absence of liquidity and geographical distances.

Networks:

1. Intra-country exchange consolidation will continue, but inter-country consolidation will still be a challenge. Cross-border initiatives, such as the ASEAN Trading Link, will mitigate this challenge for regional transactions and encourage investment from international asset managers.
2. The influx of liquidity into Asia Pacific will be bolstered by expected higher returns from more attractive valuations. In addition, investors are searching for a ‘safe haven’ for investment that offers less complexity and risk compared to developed exchanges.

While you’re here…

• Learn more about how you can trade globally and optimize locally.
• Download the Global Trading brochure.

Although granted a licence in March 2010, it wasn’t until October 31st this year that Chi-X went live in Australia and the ASX (Australian Securities Exchange) had to face its first real competition. Much was made of Chi-X’s fast start, grabbing a 2% share of the market in less than a month, but the ASX hadn’t been sitting back just waiting for the new kid on the block to turn up; it had been making some plans of its own.

Those plans came to fruition on November 28th with the launch of ASX PureMatch, the exchange’s high-frequency, low-latency trading platform which, in combination with its ASX Trade and ASX VolumeMatch solutions, will not make it easy for Chi-X to end up with a share of the Australian market comparable to that which it can boast in Europe. (The newly constituted BATS Chi-X Europe is estimated to transact 25% of European equities trading volume.) Upon launch PureMatch quoted prices in the securities of only 10 companies – though they were a group of majors, including BHP Billiton, Rio Tinto and the banks. As of December, the full extent of the S&P/ASX 200 plus ETFs can be traded. It will be interesting to see if Chi-X Australia will be able to maintain its early promise in the face of such a robust response.

There is one certainty, however: the development will provoke a more efficient and competitive market place, with an emphasis on lowering both latency and trading costs. And, while it is likely that the appetite of other trading facilities to enter the market will partly depend upon the Chi-X foray being successful, the regulator has already stepped up to the mark in recognising that the nascent fragmentation should be accompanied by rules for best execution. ASIC (the Australian Securities and Investments Commission) has adopted the best ideas from the US and European regulatory initiatives and fused them into its own well-considered Market Integrity Rules, with which participants will have to comply by October next year.

Trading methods are bound to change quickly; not all brokerages are using smart order routing yet but it is reasonable to speculate that the vast majority will be doing so within the next year. Also, the availability of high-frequency facilities will encourage the further use of algorithmic and automated trading tools – the market is set to become a lot more sophisticated. SunGard will be at the vanguard of this process with its Valdi suite of algo trading and smart routing solutions, enabling both domestic and international brokerages to make the most of opportunities in the evolving Australian market.

While you’re here…

• View the related blog on Australia’s capital markets
• View the Valdi Smart Router brochure

1. The launch of Chi-X Australia’s alternative equities trading exchange: With the go-live of Chi-X Australia on October 31st, there was much talk about the introduction of competition to the Australian market, and how it will impact trading in the coming months, and of present and future Smart Order Routing (SOR) technology to help Australian market participants seize liquidity fragmentation opportunities. SunGard passed vendor certification testing with Chi-X Australia on September 20th, and was ready to operate on October 31st with smart routing between the ASX and Chi-X markets.
2. New technology: Wider automated and algorithmic trading trends were another important theme in the discussions. It is widely believed that these technologies will bring serious disruption to the current way of doing business in the next two or three years, one of the key impacts being that manual order entry through screens would essentially become marginal for both buy-side and sell-side firms.
3. High Frequency Trading: The role of High Frequency Trading (HFT) and possible regulatory reactions were also discussed. Different views emerged on HFT’s role in the industry, but a consensus emerged: the evidence indicates that the majority of HFT actors are efficient liquidity providers and do not contribute to additional volatility. There was a view that the regulator should play a larger role in defining the rules for HFT, but also a fear that the regulator might go too far and propose some theoretical measures that are not backed by real-life data, which could be counterproductive.

The FIX Australia event confirmed the current high pace of change in Australian capital markets, and the many concerns over new technology, regulation and market conditions. SunGard looks forward to helping buy-side and sell-side customers capitalize on these changes and strengthen their local and international positions.

Read the related press release: SunGard’s Valdi Smart Order Router to Help Australian Broker-dealers Seize Liquidity Fragmentation Opportunities

Since SGX REACH went live in the Singapore Exchange (SGX) on August 15, the republic’s trading community can look forward to reaping the benefits associated with advanced trading technologies, such as improved performance, higher execution price, enhanced productivity and added services.

SGX REACH is the exchange’s new software matching engine that will provide remisiers with advanced algorithms so that they can send their orders in at the right time, cover their positions, and ensure their orders are executed.

What’s new in the SGX REACH trading platform? It will offer six new order modalities, including Market Orders and Market to Limit Orders, both with the objective of guaranteed execution.

SunGard, a long-time partner of SGX, on 21 and 22 June hosted a two-day SGX event in Singapore to educate more than 400 brokers and remisiers about SGX REACH – what it is, what it can do for them and how they can use it.

As a software vendor and leading provider of algorithmic trading solutions, SunGard is now all geared up to provide the software that will allow brokers in Singapore to work with the REACH system.

Algorithmic trading is currently widely used in Europe and the US, with many of the traders and brokers there aware of what it is and why it is necessary. In Asia, while many international brokers offer algorithmic trading solutions, local brokers are only now getting onto the algo bandwagon.

It is akin to something of a revolution for them. For example, a dealer at a Chinese broking firm in Hong Kong was all praises for algo trading, saying: “This algo is impressive! Before I used to check the price manually and update the order accordingly. It took a long time and I had to keep my eyes on the screen every second. Now I just leave the algo alone and it’s so much faster.”

The use of algorithmic trading is growing very quickly in Asia. According to research and consulting firm Celent, Singapore’s current usage level of 38% is expected to rise to 50% next year; and Hong Kong’s from 48% to 62%. This compares to a 60% current usage level in the US. Algo trading is proving to be a trend that brokers need to follow, or risk being left behind.

There are four main reasons for brokers to use algorithmic trading. The first is improved productivity. With algo trading, brokers can take more orders using the same level of technology because algorithms can relieve traders of parts of their workload.

Secondly, algos can improve order execution performance and boost the price of execution because they allow brokers to take advantage of the opportunities that arise as a result of issuing their orders at greater speeds; as compared to issuing them at slower speeds, if they were to be working manually.

Thirdly, algos help brokers empower their clients. When a client asks for a VWAP (volume-weighted average price) or a TWAP (time-weighted average price) order, for example, brokers need to be able to fulfill the request. It becomes a question of competitiveness. If the broker doesn’t have what the client wants, the broker will be at a disadvantage.

Lastly, algos are good for handling market specificities, giving brokers the flexibility and customisation ability to meet their clients’ needs.

At a more advanced level, algorithms can help traders attempt to be one of the first to enter the market when it opens by sending orders at a millisecond precision. They can help traders profit from tiny discrepancies and market open volatility and also help them automatically handle the force key rule, a specificity of the Singapore Exchange.

Have you ever lost an opportunity because you were too slow? Do you sometimes feel overwhelmed when constantly monitoring prices? Have you ever wished to have peace of mind during the trading day?

If your answer to any one of these questions is yes, can you afford not to have algo trading on your side?

ASEAN Exchanges group involves seven exchanges from six countries (Thailand, Vietnam, Indonesia, Malaysia, Vietnam and Philippines) with a combined GDP of $1.8trillion, 3,600 companies with a collective market cap of $1.98 trillion. The project will initially link four exchanges: Bursa, Philippines Stock Exchange, Stock Exchange of Thailand & SGX-ST (the equities branch of SGX).

As international investors interest in the Asian market grows, the national stock exchanges of South East have found it difficult to compete with the much larger markets of China, India and Japan. By grouping together, the ASEAN Trading Link will enable the member exchanges to create a “bigger block so that when we stand up our voice is heard” said William Wong, director, sales and clients, Singapore Exchange (SGX).

As well as the benefit of scale, the ASEAN Trading Link will act as a passport to exploit the investment opportunities that exist across the region but have been difficult to access due to the fragmented market structure and lack of cross-border integration. “To date trading in the ASEAN market has meant using a series of brokers in different regions that connect unilaterally via that ends up resembling a spaghetti network,” said Wong. “We want to unify this through the ASEAN Trading Link.”

Connecting infrastructure

There are three main components in the ASEAN Trading link, explained Mathias Bellancourt, sales director (India and South East Asia) for SunGard Global Trading, the company mandated with designing and running the platform. The Intra ASEAN network (IAN) is the infrastructure connecting the various national exchanges. The ASEAN Common Exchange (ACE) gateways provide the connecting points between the exchanges while the Neutral Access Points (NAP) provide access for parties from outside the ASEAN market such as non-ASEAN brokers, outside vendors or international institutional investors.

Order routing across all of the ASEAN exchanges will be one of the primary features enabled by the ASEAN Trading Link. The originating broker will place its order at its local exchange via the ACE gateway. The order can then be sent to another ASEAN exchange via the IAN to be executed by a sponsoring broker on that exchange. The same process also applies to originating clients from outside of the ASEAN Exchanges that will be connecting via the NAP.

There is a similar aggregated approach to the distribution of market data for the ASEAN exchanges. Each exchange will send their market data to the ACE gateway of the other exchanges, meaning that there is a single point of access for the market data of all exchanges. So while the order flow goes from the client to the originating broker to the exchange, the market data travels in the opposite direction but via the same network. This order flow places a particular emphasis on the local ACE gateways.

Most importantly for the audience of assembled local brokers, the ASEAN Trading Link will involve the bare minimum of disruption, as Bellancourt explained. “A key point of the Trading Link solution is that we will provide all of the ACE gateways with a standard FIX interface meaning that none of the originating brokers will have to alter their own existing infrastructure in order to connect to all of the other exchanges.”

The ASEAN Trading Link should start to operate in Q1 2012.

CEP is ideally suited to the trading world because it is technology that allows you to deal with information that is in motion rather than at rest. One of the biggest problems facing capital markets firms is the sheer volume of data and the speed at which it is moving. And for firms operating in the high frequency trading space, the speed of execution is a constant imperative.

In such high volume, low-latency environments CEP technology comes into its own. Trading decisions are not binary choices but complex events where a number of concurrent factors have to be acted on at the same time. A CEP engine uses real-time datastreams rather than traditional static databases enabling it to process millions of events per second and for traders to make decisions on all these events in microseconds.

In the Asian capital markets the speed of trading may not yet be up to the level of microseconds but there is every possibility that this will soon be the case. The Singapore exchange is investing in a new advanced trading platform that will make it the quickest in the world and other exchanges in the region are likely to follow suit.

System set-up

A typical CEP system will have inbound and outbound adaptors to get information into the system (such as market data) and out of the system (execution decisions). The CEP engine itself will process millions of events per second and makes decisions based on the logic designed by users in the application. Some systems will also employ visualisation to help with the application development process. For example, CEP vendor Streambase has a graphical development studio to enable users to design their own applications.

The rapid development of applications and for algorithmic traders this is especially important. The shelf life of a high frequency trading algorithm is constantly reducing (some firms will modify their algorithms on a daily basis) so the quicker these algorithms can be developed and brought to market, the greater the competitive advantage for trading firms.

When you change your algos every day this makes risk management much more important on both a pre and post-trade basis. The key to pre-trade risk management in a high frequency trading world is that it has to happen in microseconds and be able to be modified according to changes in regulation and compliance requirements.

Post-trade risk management is also increasingly vital for any firm engaged in algorithmic trading and this is one area where future development of CEP technology is likely to focus. Previous end-of-day P&L reporting, trade monitoring and market surveillance is no longer acceptable in this trading environment, it must be in real-time in order to spot erroneous trades or changes in market behaviour that warrant a change in the algorithm.

The next area of focus for CEP technology is making it applicable for adoption by a wide group of users across the enterprise. For algorithmic trading firms this wide group will include not just prop traders, quantitative analysts, brokers and business analysts but also risk and compliance managers. As CEP becomes more widely deployed across the organisation, firms will also want to consider how cloud computing can be used rather than existing IT infrastructure.

There has been great change over the past five years in this area. Ned Phillips, CEO of Chi-East, noted that five years ago people were talking vaguely about dark pools and alternative markets, but were generally skeptical that it would happen, or at least that it would take a long time. “Two years ago, people were saying I think this might happen and were generally more accepting. What we’ve found in the last 12 months, across all alternative venues, is that people are no longer wondering would alternatives happen, but when and how. And that’s the big change we’ve seen,” said Philips.

Indeed, recent developments bear that out. Chi-X Japan and Chi-East were both launched last year, and also the news in recent weeks that Chi-X Australia has finally been granted license.

When discussing whether High Frequency Trading is additional quality liquidity for an institutional investor, panelists agreed that HFT is important for market making on lit pools, “but it does not make sense to have HF Traders in a dark pool because it defeats a lot of the objects of a dark pool”, commented Chris Jenkins, regional head of Tora Trading. “The vast majority of what dark pools and HFT do is increase liquidity, and improve execution. But HFT and clearing go hand in hand, continued Phillips. The cost of clearing is so high in certain markets that you would not see HFT liquidity there; you have to look at the whole cost of a trade. In Europe, clearing costs have fallen dramatically, which is better for the broker, the retail and the institutional investors”.

Another factor that is brought in when alternative venues exist is smart order routing. More markets, or venues, mean brokers have options, and their portfolio managers will want them to get the best price. This change will come in the form of best execution policies. Smart order routing is the result of these policies. In Europe, with 20 dark pools, this is already in place, but in Asia the picture is more mixed. When there is a single market, as in many markets, such as Hong Kong and in Singapore, there is no need. However, in Japan and Australia there is. To add the list of markets with multiple venues, Thailand has recently announced it will allow alternative venues. We have yet to see any of the providers enter that market though.

“There is obviously a much bigger push in the US around best execution, and not just by the brokers, but also in the investment houses themselves, be it their own internal mandated policies, they have to prove to their management and their PMs that they are seeking the best price and best liquidity that they possibly can,” noted Phillips.

On dark pools benefiting the market in general the panel pointed out a report by ITG done some nine months ago, that studied millions of trades in Europe over the time before dark pools were introduced and the time after. The report said that after dark pools arrived only three things can happen, the execution gets better, it stays the same or it gets worse. All that report did, through data, was prove it did not get worse. They are now working to show if it got better or not. So the benefit of dark pools, or at least that they do no harm, has been shown in markets.

Competition was a recurrent theme during the panel, with all members agreeing that it was a good thing, for all investors, both institutional and retail. And a clear benefit of competition is lower costs for all market participants. This was particularly highlighted given the location of the CityDay, Hong Kong, which was pointed out as not the cheapest place to trade in the world. “I think there would be a benefit if it broke potential monopolies and if it allowed, specifically on the clearing side, for the cost of clearing to be lowered. An execution only business is a low margin business and high clearing costs can destroy that. So if mergers brought in a new regime of competition, that would be a great thing for everyone,” said Chris Jenkins, regional head of Tora Trading.

A great analogy was used by Philips to highlight how strange equity markets are in their treatment of institutional investors. He pointed out that you do not expect MacDonald’s to buy hamburgers in the supermarket. The price would be wrong and the supply would be insufficient. So they go to wholesale sellers. “The equity market is one of the only major markets out there where you are forcing wholesale investors to interact with retail investors. It’s the wrong economy of scale. Venues like ours allow the institutional guy to meet up with the institutional guy and trade at the price that’s right,” he noted.

This issue was addressed by a panel at SunGard’s CityDay in Hong Kong late last week. The discussion came at a time when news was circulating about ASEAN markets moving closer towards establishing a link that has long been discussed.

The panel looked at what was driving the market and the challenges faced by cross-border investors, as well as the different situations in various countries when it came to foreign participation.

Three main drivers for cross border trading were identified. First is the trend towards global investing. Partly driven by the fact that you have  country A shares, traded in country B, and partly by the move towards greater diversification and the search for more trading opportunities outside domestic markets. Second is market access. There are more Pipes and a greater choice of algos today than you had a couple of years ago. Third is that people need products to trade. Nowadays there is a lot if interplay between products, for instance ETFs versus cash versus the futures on an underlying index.

On the ASEAN link, Gary Tan, head of market development and iOCBC at OCBC Securities, highlighted that  the growth in foreign involvement in these markets was the main driver. “If you look at the World Exchange Federation statistics, in particular for Indonesia, basically you are seeing an average 60% year-on-year increase in foreign trades into the exchange versus the total turnover of the market. So that forms the basis and why the ASEAN link is being set up.”

ASEAN is an initiative from regional exchanges, and there are still issues around counterparty risk, operations and settlement. As a competitor almost to any such link, the panel discussed the use of Pipes and algos by global brokers to access the various markets. “This is an initiative that is coming up against another model already in place, which is  that regional brokers have existing connectivity, and existing custody relationships in place,” said TK Yap, executive director at OCBC Securities. “A client once said to me: anyone can put a pipe in place, the difference is whether the sell side broker understands what’s needed to drive flows into that pipe, such as the software and intangibles ,” he added.

Panel members came from different countries within Asia and gave perspectives on cross border trading in those countries. Julia Kim, strategist/ manager, Prime Strategy Development and Management at KR Futures, talked about the international moves by Kospi, with listings in America and Europe, “In Korea, especially after the inception of Kospi on CME and on Eurex, there have been huge inflows and outflows looking for opportunities in cross-border trading. Locally in Korea, there is a trend for local hedge funds to find  arbitrage opportunities, using cross border trading.” This was not without problems, facing issues such as much of the volume in the Eurex Future being driven by Eurex members and market makers,  not Korean investors. The CME linked options have faced liquidity issues.

Local regulations were also given as possible hindrances to cross-border trade. Indonesia requires all FX conversion to be done onshore. “So you are always faced with the issue where you choose to settle in your preferred currency, but the FX exchange rate you are offered could be exorbitant and could wipe out all your capital gain,” said Tan.

On Taiwan the panel was positive, with Steven Chou, Director & RO, Futures Division, Taiwan Concord Capital Securities, saying, “The  trading volume of TaiEx futures has contributed to the greater volumes on TaiEx. And the trading hours of the MSCI TaiEx is even longer than the TaiEx itself, so arbitrage opportunities are there for investors in this region.”

So while cross-border undoubtedly faces challenges around regulation, liquidity and custody aspects in the Asian market, , there are positive signs, and considerable flows occurring. With moves like the ASEAN Link and the general push by the industry towards greater cross-border trading, the market is surely set to grow.

Back from India where SunGard attended two events – TradeTech and FIA -, we would like to share a few takeaways on the key trends that keep the Indian exchanges and brokers awake at night.

First of all, while the two main exchanges in India – National Stock Exchange & Bombay Stock Exchange – continue their respective growth as well as their competition, new exchanges are popping up -MCX, NCDEX, USE, etc. These exchanges will be focussing in five main areas in 2011:

1. Technology: Speed is now of the essence, as in other markets, and exchanges are investing in technology to offer best of breed trading for their members in particular those that need HFT capabilities. So the exchanges are now offering co-location facilities.

2. Products: Exchanges have been launching new products – currency futures, new interest rates and indexes, etc. and commodities exchanges are seeing dramatic growth in trading volumes.

3. Volumes: The volumes on Indian exchanges are still increasing steadily. NSE leads the pack, taking 80% of the notional value traded, but has a smaller lead in terms of number of trades (NSE 65%; BSE 35%).

4. Global Alliances: the exchanges are participating in the global alliance wave. For example, NSE is working closely with SGX to list Indian products and, Eurex now trades Indian products.

5. Market safety: On the derivatives side, the focus is on having as many products as possible go through CCPs. In equities regulators are maintaining a tight grip.

Among the brokers, several concerns are widely expressed. Transaction costs remain too high for many Indian brokers. Obstacles also exist in the algo trading field, in which the entrance barrier remains high due to stringent authorization procedures. Also some brokers, while though they welcome new product introductions by the exchanges, complain that they do not receive good information or training around these products.

Today SunGard can help Indian brokers access NSE and BSE in DMA, and to implement order management and/or algo trading solutions to support their local and international business. Soon SunGard will be empanelled by the NSE market, which will help further with development of our business in India.