China: Electronic Trading Offshore Global Markets


By Alan Dean
As recent history shows, China has a vast and diverse economic system, which contains a number of economic sub-systems, many of which have experienced growth in the last 36 months. In the media, headlines portray China to be an economic powerhouse, with expansion plans that have far reaching implications for these domains, including electronic trading in Financial Services.
One area that has seen much attention from western companies in the financial sector over the last two years is that of the Qualified Domestic Institutional Investors (QDIIs). More and more of the QDIIs, are gradually being granted authorisation by the Chinese government to trade global offshore securities in the stock, bonds and other securities. QDII programs are used in places where the capital markets are not yet completely open to all investors. For example, any institutional investor in China that obtains approval to be a QDII may invest up to 50% of net assets into allowable foreign securities, so long as not more than 5% is invested in any one security.
Background on some recent changes to the QDII programme
According to, the China Securities Regulatory Commission (CSRC) has confirmed it had signed Memorandum of Understandings (MOUs) with four jurisdictions, namely Australia, Germany, Korea and Luxembourg, in addition to Hong Kong, United Kingdom, Singapore, Japan and USA over the past year. This means for commercial banks, QDII investment products issued by commercial banks may invest in listed stocks and mutual funds supervised by the relevant regulatory bodies in these jurisdictions. Also, in the case of Chinese fund management companies (FMCs); in 2009 the FMCs were permitted to extend their asset management services to multiple-client accounts, following single client segregated account services, which were launched during 2008. Whereas now, FMCs may expand their managed account asset management services to include investments in offshore markets and mutual funds as well as offering QDII funds.
To be able to invest offshore, FMCs need to apply for a new QDII investment quota or use any balance of their existing QDII investment quota (originally granted for the launch of QDII funds), provided an approval is obtained from State Administration of Foreign Exchange (SAFE).
Trading offshore – Global Markets
Global Markets may be a new experience that some of these Chinese Funds’ find they have insufficient understanding or experience to adequately deal with.
This perceived shortfall of global markets trading experience manifests itself in both an opportunity and a threat, each with their own risks, neither of which can, nor should be ignored. Prudence and patience should be employed when prioritising the financial services opportunities in China; with their exceptionally high savings rate and positive trade balance providing an abundance of capital, some of which is targeted at foreign investment – Qualified Domestic Institutional Investors (QDIIs), this is a fledgling sector and is transitioning very slowly.
What is important for western companies to consider is that a lot of leg work will be necessary, whilst it may feel like a fruitless exercise, it is important to stick at it and be sure that your value proposition is appropriately reviewed in the right forum.
The financial services arena in China, is no stranger to electronic trading, this can be seen with their domestic solutions, which demonstrate a good deal more Straight Through Processing (STP) than most western organisations.
What are the opportunities and who would be the beneficiaries thereof?
1. Chinese Funds

  • Tapping the Global Markets trading experience; obviously, there is an abundance of highly motivated experienced resources available in the offshore global market place that can help these QDII Funds with their transition into trading global markets.
  • Avoiding the trap of legacy; the advantage these funds will have over western funds is that they will be able to acquire and implement the latest “best in class” solutions and thus not be steeped in legacy systems to hold them back.
  • Leaping ahead of western Funds; the advantage of hindsight is always useful and often can only be utilised anecdotally, as the moment has probably already passed. In the case of the QDII market inside China, they have this advantage and if leveraged appropriately, the Chinese Funds can setup bespoke highly focused operations designed to succeed with their challenges of electronic trading of the offshore global markets.
  • By leveraging the more modern technologies; typically built around the Financial Information eXchange (FIX) Protocol, these QDII Fund operations could go straight to the top of the class, without suffering the pain or risks associated with the last 20 years the west has endured as part of our learning curve.
  • Spoilt for Choice; the QDII Funds will not have any shortage of organisations putting their hands out to assist them with their transition in trading offshore global markets – their challenge would be to seek out the most useful.

2. Offshore Banks and Brokers

  • New Customer base; the opening of the Qualified Domestic Institutional Investors (QDIIs) market place, brings about a new client base that can be mined.
  • New source of cross-asset revenue; the QDII’s will be seeking to implement investment strategies that enable them to trade equities, futures and fixed income; most of which will have the risk of currency fluctuations, which means foreign exchange (FX) hedging as well. According to Z-Ben Advisors, total industry Asset Under Management (AUM) growth is projected to be Rmb6.9tr (USD1.0tr) by 2014, rising to Rmb15tr (USD2.2tr) or more by 2020.
  • Imbedded value creating stickiness; for those organisations who have their own technology Intellectual Property (IP) or business solutions that can be leveraged by the QDII’s as part of their operations, whether it be front, middle or back office, this can be an advantage over competitors.

3. Technology Vendors

  • New customer base to sell into; the QDII funds will be in the need of technologies and business solutions that will enable them to process and manage their orders / trades aimed at the global markets arena.
  • Leading by example; any vendors contemplating going into China to sell their wares need to be in it for the long-haul and should ideally be demonstrably tenacious and patient, since the sales cycle can in some cases prove to last many years. So for those organisations who are familiar with long sales cycles, they can take advantage of the hunger for information and being a leader in your sphere of business, demonstrated by these Funds in China.
  • Advanced Technologies the order of the day; vendors will find that if they have the most up to date technologies that leverage the latest version of FIX, or employ the latest in algorithm technologies, they will find these QDII Funds only interested in the latest technologies that will help them to succeed with their mission.

What are some of the possible threats?

1. Chinese Funds

  • Under estimating the challenges; for those QDII’s who have not yet explored trading in this new market dimension; it probably looks daunting. If the QDII allows inexperience to rule the decisions of what technologies or processes to employ as part of their operation, it would probably prove to be very costly in many ways in the medium term. The key here would be to seek assistance from consultants or consultancy organisations that are not aligned to any particular technology suite, but have a track record of implementing successful operations.
  • Analysis Paralysis; the very thought of venturing out into the offshore global markets may seem impossible for a mainland China entity and being able to forestall any commitments to technology decisions is one way of avoiding the inevitable. Thus, the organisation could take an inordinate amount of time tooling up for the operation, in the hope of the problem becoming easier as time goes by. The key here would be to seek assistance from banking / brokerage organisations that are not aligned to any particular technology suite, but have a track record of working successfully with client operations.
  • Square peg in a round hole; there is always a tendency for organisations that have a fear of the unknown to try to stay with what they know, essentially remaining in their comfort zone. This may translate into QDII forcing their local Chinese technology vendors into modifying their technology, even though it probably services the domestic market more than adequately, into an offshore global market trading suite. This move would probably prove to be too slow at getting to market and would be prone to falling foul of the same costly or painful mistakes that the offshore vendors endured over the last 20 years. The smart thing would be to have the local vendor co-exist with an offshore cross asset solution provider / vendor who are both specialists in the offshore markets and are seen to be the “best in class” in the market.

2. Offshore Banks and Brokers

  • Source of knowledge only; for those banks or brokerages who are keen to tap into the QDII opportunity, there is a price to pay. Competition is steep; there are a lot of suitors who are chasing this finite revenue pot, so the QDII’s are in a fortuitous position of being able to pick and choose. Thus a “cost-of-sale” investment in time, assistance and capability may prove to be quite costly over a protracted period of time and fruitless, simply because the QDIIs are spoilt for choice. In addition to the “cost-of-sale” investment, the key for success here is to create a value proposition that is differentiated from your competitors’ offerings; otherwise you could find yourself being leveraged only as a knowledgebase.

3. Technology Vendors Pilots and more pilots:
For those vendors who are keen to tap into the QDII opportunity, there is a price to pay. Competition is steep, and there are a lot of western companies who are prepared to give away a lot of time and technology by way of doing pilots. Whilst this is a very good way to have one’s technology reviewed in the appropriate forum, it is also fraught with risks. Be sure to structure any pilot with a Broker or Bank as part of the trading process so that a full end to end trade life cycle can be tested. The good thing is that your technology is already FIX enabled and thus the interface into the global markets arena is probably the most trivial element of any pilot.
According to Z-Ben Advisors, there are 6 key focuses in China’s QDII market this year:-
Market Sizing:

It is projected that the total industry Assets under Management (AUM) of Rmb6.9tr (USD1.0tr) by 2014, rising to Rmb15tr (USD2.2tr) or more by 2020. Z-Ben Advisors expects AUM growth to be supported by two additional factors,

  • First of which is capital appreciation of the industry’s invested assets, especially equities.
  • Second variable underpinning AUM growth is an expansion in both the number of new FMCs entering the marketplace (totalling 77 firms by end-2014) as well as greater regulatory ease in launching new products. QDII funds will rise in size to USD120bn by 2014, accounting for 13% of industry AUM.

More Reform, More Opening Up: Significant long-term support for stock and bond market growth are now in evidence.
Demand Dynamics: Mutual funds will be the key beneficiaries of growth in China’s GDP and incomes over the next ten years.
Product Development: More than 500 new product launches will be required to meet demand by 2014.
QDII: A flood of new quota will transform the QDII program by 2014, with as many as 50 Chinese fund managers competing to offer offshore investing, primarily through equity funds.
Global Ambitions: Hong Kong is rapidly becoming a staging area to launch a global assault by well-funded and ambitious Chinese fund management companies.
The scale of these ambitions is, perhaps, unmatched by any other nation’s fund management companies, and we are forced to the conclusion that Chinese FMCs will soon have both the weight and will to acquire almost any foreign rival that can expand their territorial reach.
A minimum of four of these Chinese FMCs are projected to rank among the ten largest global asset managers by market capitalisation in 2014.
Clearly, the QDII initiative represents a significant opportunity for many organisations, both inside mainland China and offshore.
What does this mean for the FIX Protocol?
From a technical and electronic trading standpoint, it is the FIX Protocol that is making this transition easier to achieve for those banks or brokerage operations that are looking to service the requirements of QDIIs.
Back in September 2008, it became apparent that the technology vendors in mainland China were already using variants of the FIX Protocol or the Chinese equivalent “Step”, which is considered to be entirely compatible with the FIX Protocol from version 4.0 onwards.
Due to the advancements and inroads made by the FIX Protocol, the QDII opportunity is there for both banks and brokerages outside of China to capitalise on and service, not withstanding the other business challenges, compliance, credit facilities, know your customers (KYC) etc. they need to deal with.
Sources for research material utilised for this article: