With a January-July 2013 equity turnover of US$261.27 billion and a total market capitalisation of US$399 billion, Thailand is one of Asia’s hottest markets. Foreign firms are increasingly looking to access Thailand, and local asset managers are starting to push their assets outside the country in order to seek returns.
With this backdrop, on the 12th September, GlobalTrading, with the Stock Exchange of Thailand, hosted a buy-side roundtable, with over 20 senior buy-sides in attendance, to look at the promotion and development of electronic trading by institutional asset managers.
Much of the debate was definitional in context, with primary questions at the opening of the discussion relating to why the uptake of electronic trading in the market has not been as sharp as some would like. Two key elements seem to be holding back the use of FIX and wider electronic trading; the cost of implementing new systems, and the legacy of the old systems impeding attitudes and strategies towards risk management. There was also a summary of similar discussions throughout other emerging markets in Asia and how much of the driving influence of greater electronic trading comes from foreign asset managers and brokers, and from the exchange, rather than domestic market players.
“The event was good and informative where I could understand what should be the best practices and standardisation for the Thailand market. The development of algorithmic trading will play a key role in buy-side trading and require all of us to be prepared for upcoming evolution. Also, I enjoyed networking with people in the industry!”
The roundtable consisted of a Q&A panel discussion, with representatives from Omgeo, Charles River Development and UBS, answering questions from the Editor of GlobalTrading, Peter Waters, and the delegates, to understand their difficulties of implementing increased amounts of electronic trading.
One key concern holding back electronic trading is the worry around the changing nature of risk. The attending buy-sides asserted that as they have a personal, phone-based relationship with their brokers, they have an ingrained level of trust, and feel that the risk has been mitigated by the checks and balances as part of the execution strategy. The physical connection of a phone is seen as a risk control measure that would be lost with an electronic connection. The panel worked to show that replacing the phone with an electronic desk does not change the risk of the trade, but can in fact help mitigate risk, by removing error and adding an additional layer of control. The phone would not disappear, but would be replaced in its primacy.
As with many new technologies there is a critical mass necessary to add impetus to the leap to newer technologies, and in a market that is so dominated by retail flow as Thailand, that mass could be difficult to achieve with only institutional firms driving the change. However, the early adopters of the technologies spoke at the event of their successes, and the difficulties they had faced. There is also a significant drive for electronic executions from retail brokerages, and the switch on the institutional space should follow suit.
Group Head Technology Products
The Stock Exchange of Thailand
“We were delighted to collaborate with GlobalTrading who organized the Bangkok roundtable for the 1st time in Thailand. It was our pleasure to welcome AIMC, top asset management companies and other stakeholders. SET is keen to promote electronic trading as it improves market efficiency. The sharing during the event was Indeed insightful and beneficial for all participants.”
“As an industry, it is important we continue the dialogue on how to improve efficiency and decrease risk in the trade process.” Stated Hasan Rauf, Head of APAC Sales. “Across emerging markets in South East Asia, including Thailand, there are varying levels of electronic trading and post-trade automation. In this part of the region, some market participants continue to rely on telephone or fax for these critical functions, exposing their firms to operational risk. This is starting to change, and we are seeing momentum build in markets like Thailand to improve infrastructure. It’s a community effort, at the end of the day, and Omgeo is working hard with both local and international firms to increase awareness of the benefits of STP, whereby trades flow from execution to settlement with little or no manual intervention. After all, the technology and best practices exist today to connect firms across markets and asset classes in this way, so we need to work together as an industry to make these improvements happen.”
The evolution of the Thailand market microstructure with respect to liquidity and volatility is driving the need for Buy Side firms to embrace Electronic Trading. This brings efficiency and transparency in execution and settlement: a critical regulatory theme across global markets. A co-ordinated effort from all industry participants will be required to continue raising the awareness of electronic trading amongst domestic asset managers and assist with its implementation
One concern, as with all fundamental changes to the trading desk, related to the traders themselves, and again the emphasis was placed by the panel on the way that the greater introduction of an electronic desk would free up the buy-side traders to focus on the more difficult orders, and the ones that required greater skill, and would allow the relatively vanilla orders to be more simply and cheaply executed.
Overall, the greatest advantage promoted to the delegates was the operational efficiencies granted to the desk as a result of greater electronification. By executing electronically, the manual levels of processing are greatly reduced, from a risk perspective, from a data entry perspective, and through into the middle and back office. Once the orders are entered and dealt with electronically, the pattern of savings and improvements in efficiency flows through the entire trade process, from pre-trade controls to settlement.
The infrastructure is ready to be used, the market is ready to increase its electronic flows and Thailand would greatly benefit from the additional controls and efficiencies gained by increasing the use of FIX and electronic technologies. Now is the time to pull the trigger.
“Electronic Trading, as with many other changes in technology or market practice, encountered initial resistance when we first discussed it with domestic clients in Thailand.
As with other markets, buy-side demand stimulates the sell-side to offer new services to their customers and to provide electronic trading capabilities that span both the domestic and international markets with a single, common connection method. As little as 18 months to two years ago, we found there was very little FIX capability within the domestic Thai broker community, but now an increasing number of sell-sides are able to support electronic trading via FIX and we expect the numbers to continue to rise.
The buy-side attendees at the round table expressed a strong interest in electronic trading and the adoption of FIX within the Thai financial community, however they also indicated that further industry discussion is needed to address areas such as operational risk and the changing nature of broker/dealer relationships to ensure a level of comfort from both the buy and sell sides.”