By Vincent Ong
Up until about two years ago, mention “electronic trading” in emerging markets across Asia, and the most common reaction, especially from domestic institutional investors, was a mix of bemusement and disinterest, or possibly both. The prevailing mindset was that this form of trading was unlikely to impact them personally in the near future. Well – it appears that the future is closer than many had envisaged.
Fear of the unknown?
As always, adoption of electronic trading in emerging markets has been driven by a combination of fear of the unknown, on one hand, and gradual acceptance of the upside, on the other.
The key concern we hear most frequently here at Bloomberg, from both exchanges and the broker community, is the ability of electronic trading to manage risk and volatility. Ensuring that robust and proper systems are in place to help navigate any shocks and wild swings in the market is an important precursor to persuading potential adherents of the upside of electronic trading.
Uncertainty over the impact of electronic trading on the relationship between investors and brokers has also caused some resistance. Some were unwilling to dilute strong relationships with counterparty brokers, often cultivated over time, and over the phone. Others point to the exchange as not being ready, while some say brokers are not keen on receiving orders via electronic means (even if just routing to the desk). And there are those who claim the market is simply not liquid or developed enough to support electronic trading.
Another reason standing in the way of change is simply that the phone is hard to put down. Deeply ingrained habits are tough to change. The perception was and, sometimes still is, that calling the broker to place an order is a faster and clearer means of communicating instructions. Also, some argue, during those small personal moments over the phone, it is possible to gain some valuable market color. We have clients who tell us they like and want to place orders into the market themselves. For them, picking up the phone is almost second nature. Electronic trading represents a significant mindset shift for many domestic investors.
Acceptance of the upside
Despite these business challenges, we see markets evolving and participants – both brokers and investors – committing to change from traditional phone trading to electronic trading. Increased industry media coverage, events and conferences have also helped promote the benefits of electronic trading.
This, in turn, has led to greater buzz and awareness amongst key players. Exchanges – such as the Bursa Malaysia – are taking steps in the direction of electronic trading. They have shown a commitment to change by implementing trading via direct market access (DMA), which is slated to go ‘live’ later this year. Some, like India, Thailand and Indonesia have already gone ‘live’ with DMA. Exchanges and regulators play a key role in engaging the market to open up and eventually allowing investors to trade via DMA. In emerging markets, this is no small event.
One of the main reasons the exchanges want to go electronic is because they have seen that developed markets featuring electronic trading attract more foreign institutional investor asset flows. This trend of foreign institutional investors driving the move into electronic trading is not an uncommon phenomenon worldwide. These institutions already trade electronically in other more developed markets and are looking for the same capabilities in emerging markets.
In addition, traders at these institutions are frequently measured and paid by beating certain transaction cost benchmarks. The only way to objectively capture and measure the data is to trade electronically. Also, as part of their workflow, their execution management system (EMS) and/or direct FIX connections are frequently integrated into an order management system. This streamlines their workflow and is compliant with internal processes as it minimizes manual input and, thus, human errors.
This increased volume from electronic trading improves market liquidity, efficiency and transparency and ultimately may lead to reduced transaction costs for investors.
Our experience at Bloomberg with domestic institutional investors has also changed over the past two years. The more traditional approach toward electronic trading is gradually changing and there is increasing receptiveness to change. Understandably, there were good reasons for their previous mindset. Most, if not all, of their investments are in the domestic market, which had not heard about or asked for electronic trading. There were concerns about system integrity and impacts on the market of big orders being placed into the market directly. Electronic trading was perceived as riskier versus phone trading.
However, domestic brokers who want to capture a more international portion of the market share, are now faced with the decision of whether to invest in infrastructure to be able to compete with peers and global counterparts operating in the same market. Global brokers often have an advantage by being better equipped, since they leverage off of a global infrastructure. Like the exchanges, domestic brokers need proper systems to handle orders efficiently. It is a major commitment as it usually represents a significant investment. Added to this is the uncertainty of whether the rewards will justify the costs. However, as institutions in emerging markets continuously seek to improve and enhance their workflow, they become more aware of the availability of systems to help achieve their goals.
The shift in the mindset of the exchanges, as mentioned earlier, is also pushing domestic brokers to provide electronic execution services. And, as execution systems become more readily available, the adoption rate for electronic trading among domestic institutions has also increased. More emphasis is put into enhancing workflow, streamlining systems and straight-through processing. In some markets, there has been a threefold increase in the number of brokers (FIX and non-FIX) connecting to the Bloomberg equity order routing network.
Through media, peers and information services, domestic institutions are also starting to appreciate the benefits of having more control and clarity in their executions and transaction costs. It is a cycle that will feed itself as there is more awareness, exposure and adoption. Gradually, the market will accept this as the new norm.
The rate of change is hard to gauge, and is unlikely to be consistent across Asia’s emergeing markets. What we do know is that, while most emerging markets will not move toward full electronic trading or order routing in the immediate future, there is considerable progress in this area. We anticipate that trading over the phone and electronically will co-exist for some time, but the landscape has changed dramatically from the days when we only received strange and disinterested looks when mentioning “electronic trading”.
The India experience
The market for direct market access (DMA) trading went ‘live’ in the fourth quarter of 2008. A FIXGlobal conference was held around the same time in Mumbai to herald the event. An initial group of brokers led the way by investing in systems and getting ready for this new phase. Considerable effort was put in by all parties – exchanges, regulators and brokers – to ensure the electronic trading launch was a success.
Although it did not start with a bang, because the start coincided with the global stock market downturn, brokers we speak with now are very satisfied with the volumes since the turn of the year. Furthermore, they are optimistic that volumes from electronic trading will only grow moving forward.
Encouragingly, the growth is not just from foreign institutions because domestic institutions are starting to consider this option. The success from the first group of brokers has also convinced and prompted many others in the broking community to start providing the same services. In this context, we can see how a competitive market can spur and help further develop electronic trading.