Schroders’ Head of Asian Trading, Jacqueline Loh, shares her thoughts on trading in Asia, offering comments on which markets are primed for change, how to find value in dark pools and whether unbundling is as useful as people say it is.
Fragmentation arising from multiple sources of liquidity is a necessary step in the evolution of best execution and in the long term, fragmentation will increase the quality of trade executions in Asia. What it means for the buy-side is investment in infrastructure spending to develop new order routers and the like, so we can electronically seek out and have exposure to multiple liquidity sources. For the sell-side, it means acceptance that there will be more competition for the same block of business in the marketplace. It means different things for different buy-side firms as well.
When I think about the investor ID markets in Asia, I am not sure any model is particularly productive because ID markets make it administratively more difficult to trade. IDs can make best execution very difficult to implement, especially if cash and stock checking is the primary consideration. Some of the ID markets, namely Taiwan and Korea, allow trading through omnibus accounts and that seems to be the way it is evolving. The ID markets are slowly going away, but having said that, the most productive example is probably China because the brokers seem to have a handle on exactly how much cash and stock you have in your account, and therefore how much you can sell and buy. You cannot overspend or oversell, and it is relatively easy to take part in IPOs.
Trade allocation used to be a problem with investor IDs; for example, explaining to compliance and regulators why the prices are not exactly the same between accounts. In these cases the use of omnibus accounts really help. Executing through omnibus ID means you know exactly what is in an account and do not experience many of the issues associated with overselling or settlement. It is a lot cleaner.
With retail-heavy markets, anonymity is the primary consideration for us. We tend to trade more using electronic means and make use of dark pools in retail-heavy markets. In addition to that, the algos we use will be more price-specific, rather than volume-participation models, which are more price impacting.
Best Execution, in the Dark?
You would think that dark pools would have more success in markets where spreads are currently wide and there is a need to be anonymous, which would imply ASEAN markets. In practice, however, it has had more success in Hong Kong, and that is because there are more users of electronic trading there. Perhaps the users are a little more sophisticated as well insofar as they are willing to take accountability for their executions. Which is, in fact, what defines electronic trading.
In our experience, dark pools make a difference in terms of liquidity, however, the question is what creates that difference? Is it the electronic trading system feeding through the dark pool that provides the benefit or is it the dark pool, itself? I would say it is the former, but that may depend on each user. routers. I hope the Securities and Exchange Board of India will consider further change including allowing stock crossings and clarifying the rules regarding P-Notes.