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Lee Porter, Liquidnet, explores the new territory of alternative trading platforms in Indonesia and Malaysia as traders seek new opportunities for growth.

In a relatively short time, alternative trading platforms in Asia have emerged as critical venues for institutional traders to source offexchange liquidity. They provide choice and ultimately help reduce costs through reduced transaction costs and lower market impact. So-called ‘dark pools’ have largely been focused on trading around the established financial centres of Hong Kong, Japan, Singapore and Australia, where the majority of the region’s liquidity is located. The next stage in the industry’s evolution in Asia is a push into emerging markets, and moves are well underway.

The increasing interest in South- East Asia stems from two long-term trends impacting the buy-side: high economic growth  which is fuelling demand to trade locally listed securities where there is often low liquidity, and high market impact. As regards the first point, the story of South-East Asia’s economic transformation has been remarkable. Real GDP growth is expected to average 6% between 2011-2015, supported by strong domestic demand, according to the OECD. Meanwhile, South-East Asia’s population jumped 15% in the ten years to 2010, climbing to 607 million.

These demographics continue to attract global investors, helping push higher the local equity markets. For example, the benchmark Jakarta Composite Index gained more than 45% in 2010, making it the best performer among Asia’s ten biggest markets. More money is expected to flow into the region in the coming years. At the same time, liquidity in South-East Asia remains scarce, presenting a significant challenge for  institutions looking to trade large volumes of shares.

The Jakarta Stock Exchange in Q1 2011 recorded an average execution size of US$4,677. This compares to an average execution size of around US$1.1 million on on our platform for Indonesianlisted securities during the same period, i.e. 234 times larger than the local exchange. The story is similar in Malaysia where the Bursa Malaysia in Q1 2011 recorded an average execution size of US$6,053 compared to US$1 million reported by Liquidnet.

Local exchanges across South- East Asia, like most of their global peers, are geared towards the needs of retail investors, as seen by relatively small transaction sizes. Moving forward, we see growing demand from institutional investors to access large blocks of shares in those markets (See [1] next page). The rising demand on alternative trading platforms for South-East Asian securities has been strong.

For example, principal traded on Liquidnet’s platform in Indonesia, Malaysia and Singapore for Q1 2011 was close to US$380 million. This was a jump of over 176% from Q4 2010 (See [2] next page). When traders find a match in Indonesia they are far more likely to execute the trade, we suspect, because of issues surrounding a lack of liquidity and potential market impact costs.

In addition, traders seeking to execute on public venues in South-East Asia are contending with very wide spreads. This is a factor which can be mitigated on alternative trading platforms, helping institutional traders transact at the fairest price. The problems institutional investors face in Malaysia, Indonesia and Singapore are in fact universal. The solution for many traders is to allow institutions to transact large blocks of shares in a safe and secure environment.

Looking ahead, other markets of South East Asia may draw alternative trading platforms, such as Liquidnet. While it may be too early to speculate about a likely entry date, it is fair to say that the demographics and market dynamics support the entry of alternative trading platforms, which in turn, help support the needs of institutional traders.

Logistically, the issue of connectivity for Malaysia and Indonesia is straight forward. In both markets, some alternative trading platforms trade off-shore and transactions are processed through a licenced third-party broker and reported to the local exchange. While there are occasionally misconceptions about the role of alternative trading venues in some markets, our experience in South-East Asia has been overwhelmingly positive.

Stephanie Lawton reports on the latest from the Face2Face Forums in Mumbai and Kuala Lumpur.

Few exchanges have seen such dramatic transformations as those in India. Technology looks set to play a major role in meeting market demands with the BSE announcing its adoption of FIX 5.0 and the NSE using FIX 4.2, with plans to upgrade to 5.0 as needed. Both the NSE and BSE seem determined to not only meet, but exceed their members’ expectations and have aggressive plans to build on existing capabilities and develop new products.

Bringing together the Exchanges
Three exchanges (NSE, BSE and MCX) came together to debate the role of technology, regulators and, of course, competition.

Jim Shapiro, head of market development for the Bombay Stock Exchange (BSE), stated that the ability of an exchange to innovate and stay ahead of the market, would be the key to its success. Correctly reading how the regulators may react to situations and evolve regulations in India would also be key, he added. Vidhu Shekhar, vice president of new products for the National Stock Exchange of India (NSE), agreed that keeping pace with market growth was essential. “You need to keep your eye on the ball,” he urged. “We need to recognise what’s going on outside India and decide how we, as an exchange, respond to the challenges and opportunities of globalization.”.

Latika Kundu, head of market operations for the MCX-SX, focused on the role of technology. “It’s about awareness of products on the market and how we ensure maximum accessibility to these new products,” she argued.

Looking at the progress of DMA and automated trading, the BSE felt the process was still in its infancy, with DMA still showing market constraints. However, algorithms were attracting a lot of interest from most market participants. New players, in particular, were ramping up this aspect of their technology and product offerings, with the BSE keen to attract these new market entrants.

On the subject of regulatory changes, all the exchanges agreed that the regulators had come a long way in engaging with the market and the exchanges. The main concern centered on systematic risk and in better understanding their clients’ requirement. On the idea of a MiFIDstyle system, the exchanges said that though the issue of best execution was being actively discussed, it still remained a complex issue. According to Shapiro, dark pools wasn’t high on the regulators’ priority list and block trading provoked more interest.

The Keynote – High Frequency Trading

High Frequency Trading as the New Market Makers was addressed by Ronald Gould, Chief Executive Officer, Asia- Pacific, Chi-X Global.

To start his presentation, Ron questioned whether High Frequency Trading is ‘bad’ or just ‘badly understood’. He gradually unfolded the story by looking at the development of HFT in the US and Europe in terms of regulatory evolution and the technology arms race. He also illustrated that an Alternative Trading System (ATS) has a positive impact on trading volume, which was reflected by the explosion of trading activity in Europe and in the U.S. He predicted that Asia-Pacific markets will undergo many of the same changes as the U.S. and Europe with HFT will playing a critical role in many existing Asia-Pacific markets with relatively low liquidity.

What are the major issues for electronic trading in India?

The major drivers were still the foreign institutional investors that were showing a strong appetite for algorithms, explained Murat Atamer, vice president equities, at Credit Suisse AES. “FIXatdl would be attractive to our clients,” said Atamer, adding that India was not a market that should be traded without algos.