With Template In Hand, Buy-side Demand More Transparency


The incoming SFC regulation on electronic trading is changing the nature of electronic and algorithmic trading in Hong Kong. The initial reaction to the regulation has since faded, and now firms are looking at how to comply before the January 1st 2014 deadline.

The buy-side are being forced to ask increasingly searching questions of their sell-side counterparts, particularly relating to algorithms and technology deployed that was developed by third parties. As Jacqueline Loh, Head of Trading Asia, Schroders states “Despite the fact that our dealing desk is located in Singapore, we have done a lot of work on it. The intention is that we comply with the spirit, as well as the letter, of the regulation. Our due diligence was customised to our workflow process, with particular emphasis on the way we employ algos in our daily trading activities.”
The result, as Jacqueline continues, “was a fairly thorough due diligence questionnaire sent out early last month, after which several brokers informed me was the second most detailed they had received. We did seek feedback from our top electronic trading providers prior to sending out, just to make sure the questions were fair.”

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Industry associations, including the FIX Trading Community, AIMA, ASIFMA, and ATF have come together as part of this process, bringing together buy-sides, sell-sides, and third party solution providers, to launch a new Electronic Trading Information Template, which buy-side firms can use to standardise their requests for the relevant information. While no means exhaustive or compulsory, the industry bodies feel that by helping to standardise the way in which firms request the relevant information from each other, they can alleviate many of the potential pitfalls and growing pains of the new regulation. Heide Blunt, Managing Director of AIMA Hong Kong says “The template gives the industry the flexibility to cover a good breadth of Users. The  regulation and the Code of Conduct as it has been amended are quite prescriptive in some places, so it was also important for us to think through, as a collaborative group, the issues that the SFC may be seeking to address.”
A broader consequence of the shift in focus onto the buy-side has meant that this industry sector have asked questions beyond those required by the regulation; the buy-side have taken on responsibility for the systems used with one eye on regulation that may yet be written. The push has also been to gain additional transparency on operations from counterparties. Jacqueline adds that “in addition to the usual questions on algo testing and record keeping, we asked about dark pools and nature of dark pool participation. Although not within the scope of this particular regulation, we felt we had to ask to gain more transparency for our clients.”
Tools such as the template, as Heide states have “provided a framework, but where people want to seek more transparency and detail, they are able to do that via an addendum to the template. The template gives us a good basis but this is a living document and there will be Users adding more questions to it.”
One area of concern for the sell-side is the time left before the new regulations come into effect, and whether the buy-side will go through this due diligence process or simply drop firms from their broker lists. Jacqueline concludes, “I don’t know if the broker list will shrink, I think that will depend on the responses to our due diligence. After all, the object of the exercise is not to reduce the broker list but to act in the best interests of our clients.”