One of the advantages of being a late starter is that you get to see what everyone else is doing and assess the best model for you. This has been the case in China, where its financial markets didn't evolve their way into electronic trading; rather they simply started with it. The question now is whether China will join much of the rest of the world in speaking FIX, or whether it will continue with its homegrown protocols.
China took advantage of its status as a relative late bloomer among the world's financial markets, by building a high-capacity, fully electronic trading infrastructure from the outset. As its capital market liberalization plans unfolded in the 1990s, the authorities were quick to realise that a highly-automated, paperless, technology-driven marketplace was the key to encouraging efficiency, standardization, accuracy and straight through processing (STP).
As such, both the Shanghai and Shenzhen stock exchanges, launched in 1990 and 1991 respectively, were established on these principles and set the foundation and standards for highspeed electronic trading. The result was rapid growth in the country's investment community, as well as a boost to the domestic financial technology companies, that moved swiftly to keep pace with the demand for high-speed trading.
While China's markets are still, comparitvely speaking, in their infancy in terms of breadth and depth, this early groundwork has created one of the most highly automated trading systems in the world. While other emerging markets are still struggling to move on from legacy infrastructures or manual trading processes, China has instantly catapulted into the realm of fully STP and virtually seamless T+1 clearing and settlements in its domestic equity markets.
Since the 90s, China’s capital markets have continued to evolve, mainly through a combination of gaining experience from the international financial markets, and domestic innovation.
Automated, but not standardized However, in keeping with several Asian exchanges, China’s marketplaces have their own unique proprietary protocols. So, while trading in Mainland China’s various marketplaces may be completely electronic, there is no single, standardized messaging standard used to transact. These factors have, to some extent, stymied its potential to develop.
Shanghai and Shenzhen stock exchanges both use their own unique protocol, while the exchange gateways to the order entry systems and network are operated via their communication subsidiaries, STOCOM (Shanghai Stock Communication Company) and SSCC (Shenzhen Securities Communications Company). Similarly, the Dalian and Zhengzhou Commodities Exchanges, as well as National Interbank trading platform, each have their own interfaces.
Still a way to go ... When China joined the World Trade Organisation in 2001, it made clear that its preference was for a prudent and steady approach in the liberalization of its economy. The approach for the financial market was twofold: sustainable development, without threatening the development of the domestic financial sector; and allowing China's investors to gain experience in global markets without getting burnt.
While China has made incredible progress, there is still an extremely wide gap between its domestic set-up and that of the international markets. In particular, with the absence of alternative liquidity venues, its heavily-regulated stock exchanges (and its tight integration with the depository) and efficient clearing system, it is understandable that many Chinese investors still shy away from alternative venues and complex products.
To achieve this sustainable development sought by the Mainland authorities, many in the investment community are increasingly looking for ways to bring in more foreign technology, expertise and knowledge and it seems that FIX is one of the tools that can be used to narrow the gap.
FIXGlobal Face2Face forums were born of a desire to move away from salesfocused conferences, and towards real dialogue within the industry. The events are about education, experience sharing and critical assessment, of the development of electronic trading on a local, regional and global level. This month Face2Face hit Shanghai, and judging by the lively Q&A sessions that followed a full day of expert speaker sessions, China is more than holding its own in the electronic trading debate.
Another invitation to another conference pings into your inbox. The speakers have fabulous titles and an alphabet of letters after their name. The event promises to change the way you look at global markets, regional markets, and everything has a China angle. And yet, how many conferences end up feeling like sales pitches. And, in the spirit of honesty, how often, have we all witnessed a guest speaker’s presentation which has had a pretty solid chunk of sales-speak at the beginning, middle and end? Fast forward to Shanghai where, earlier this month, approx 180 people from the local and international financial community gathered together to debate the role of electronic trading in China at the FIXGlobal Face2Face. Almost two thirds of the vocal audience was from the buy and sell-side of the trading industry.
Don’t throw the protocol out with the vendor Kicking off with an up-to-the-minute review on electronic trading trends and innovation were Citi’s Grace Lin and HSBC’s Gavin Williamson and Alan Dean. Of particular interest was the perspective of the speakers on the key drivers for asset manager, brokers and exchanges looking to develop or upgrade their electronic trading and FIX capabilities. A flurry of questions followed, with one brave individual suggesting the FIX messaging was too slow for the current high frequency – low latency environment. Alan Dean provided the most categorical answer… “Then you need to re-look at your vendor, as with FIX we are talking low micro-seconds.” Nothing like being put straight!
View from the Exchanges Next up was an update on the development and implementation of FIX STEP/FAST at the Shanghai Stock Exchange (SSE). CTO of the SSE, Bai Shuo described the protocol as a variant of FIX, adapted for the local market. This streamlining – taking out aspects not relevant to the local market and adding in those the industry wanted – were essential to promote the protocol effectively to its users. A look at performance data of FIX STEP/FAST left other delegates in no doubt that Shanghai was poised to provide scalable capabilities that would attract a broad range of market participants.