Contributor: Nasser Khodri, managing director, Asia-Pacific, SunGard’s capital markets business
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:
- To better control counterparty risk, Asian hedge funds are diversifying their broker relationships by adopting a multi-prime broker model.
- 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.
- 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.
- 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.
- 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.
- The growing demand from the buy side will drive broker-dealers to seek electronic trading solutions that help them manage and control their risk.
- 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.
- 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.
- 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.
- 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.
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