Update on APAC Equities Trading
With Ako Nishi, Executive Director, Central Dealing, J.P. Morgan Asset Management
Briefly describe JP Morgan Asset Management (Asia Pacific) Limited, in particular its trading team?
I trade in APAC equity markets except for Taiwan. J.P. Morgan Asset Management (Asia Pacific) Limited’s trading team, as part of the firm’s independent trading function, is dedicated to delivering the best outcomes to clients, particularly through reducing trading costs and mitigating risk. Our regional trading desk consists of diverse members in terms of gender, nationality, and professional background, which has helped the desk to generate innovative ideas to facilitate more efficient trading. Our strong partnership with technology and the quant team has brought global consistency in our trading platform over the past years, as well as enabling us to make further progress in our quantitative approach. This has been especially so amid COVID-19, as we were urged to accelerate our business priorities to align with a new work environment and increased market volatility in order to maintain our execution quality.
Discuss your own professional background / career path. What is your current role and responsibilities?
I started my career at one of the major Japanese brokers, Daiwa Securities Group, as a sales trader on the agency programs / single-stocks desks, mainly covering offshore institutional clients. Then I joined the Program Sales Trading desk at Credit Suisse Securities in Japan from 2007, where I handled agency programs for institutional clients who traded in Japanese equities. I was also responsible for intelligence sharing across desks as well as utilization of crossing opportunities between clients. In the last three and a half years at Credit Suisse Securities Japan, I extended my market coverage to international equities, and performed as a salesperson of outbound agency programs for onshore and offshore institutional investors.
In 2015, I joined J.P. Morgan Asset Management in Japan, focusing on the Japan equity trading business for the first four years. Since the migration of the firm’s Japan trading business to Hong Kong in 2019, I relocated to Hong Kong and have been in charge of trading in APAC regional markets including Japan. In my career at J.P. Morgan, I have worked closely with the quantitative and technology development colleagues working on models to enhance the firm’s use of machine learning and automation tools for improved efficiency in execution and workflow. Currently I am responsible for ensuring the liquid flow in APAC markets fits into our systematic trading framework, while improving the robustness and capabilities of the firm’s systematic trading model. I also look after external collaboration, together with our technology team, with a focus on streamlining communications across many different channels so that our interactions with the sell side are more uniform and we can deal with the significant number of orders on the desk in an effective way by identifying the stocks that have irregular moves and thus need trader’s intervention. Finally, managing trading risks is essential in our automation process and is always a focus for the desk in general.
What are the unique characteristics/challenges of trading in Japan, compared with other APAC markets?
The Japanese equity market, as the world’s third largest in market capitalization, is mature compared to its regional peers. Given the large stock universe and experienced participants, it attracts diversified investors who leverage their expertise in Japan and utilize its advanced platforms such as alternative venues and crossing networks that enable investors to pursue trading cost reductions. On the other hand, there are several Japan-specific rules that could potentially interfere with those advantages and flexibility in the Japanese market, partly because the Japanese market has been independent within the context of APAC for such a long time, and thus it developed its regulatory framework on its own to protect domestic investors and maintain fairness and credibility. As a result, we have precise procedures and requirements regarding “what not to do” for investment managers who run domestic funds or for those who handle Japan domiciled accounts — this framework can be harder to work within as opposed to other regional markets, which tend to be more straightforward in their market rules of what is permitted and what is not.
How did your trading team operate through the COVID-19 pandemic? What technological adaptations were made? Are you back to fully in-office?
In the first stage of the COVID-19 pandemic, we had a company-level arrangement to work from home. The trading desk was one of the fastest on the Street to implement a remote working infrastructure to keep business as usual (BAU), no matter if we were trading from home or the office. Until early this year, our desk in Hong Kong was separated into two teams that rotated between working in the office and from home, making sure ‘close contact’ was limited to only half of our colleagues to manage the risk of the pandemic. Now about 75% of our desk is back in the office, and we have the full team in at least once a week so we can follow up on any ongoing discussions face-to-face.
Throughout the pandemic, technology adaptations were accelerated, especially on workflow improvement to reduce manual work. For example, we implemented a new logic to streamline the handling of complex order flow in equity swaps and some emerging markets that had previously been manual. Trading automation in extended markets such as China and Thailand was also pushed forward. These enhancements helped traders, as an expedited order placement process enabled us to spend more time communicating to portfolio managers amid a volatile market.
Even since the social distancing requirements were relaxed, our desk has remained flexible around where to work. WFH is always an option if we need as the remote infrastructure is in place to maintain our day-to-day work, thanks to the arrangements implemented earlier.
What are your main challenges, on a day-to-day basis, in terms of achieving best execution?
As we have moved to a more quantitative trading approach, our flow distribution to brokers is determined by our benchmark performance ranking. Educating our brokers about our benchmark and goal is one of our main challenges. We are keen to work with brokers to find the best solutions for each of our different focuses, such as the algo wheel, quality indications of interest (IOIs), and liquidity sourcing, however there may be occasional gaps in service providers’ understanding. Bearing that in mind, our trading desk will keep efforts to be as fair as possible and deliver a clear message to brokers about what we are trying to achieve, which I believe will help improve our overall execution quality and in turn benefit our clients.
Another challenge is that execution platforms are not fully mature in some growing markets, and we have limited choices when seeking liquidity. For example, the China market has been growing very fast in the last few years and trading in this market is more impactful on our desk flow compared with five years ago. However, there are unique rules for trading China in both operation and execution, which make things more difficult operationally, for example with the use of algorithms or the ability to cross with natural flow.
What are your latest initiatives in terms of cost cutting and automation?
Since the beginning of the COVID-19 pandemic, we have accelerated automating our order execution and workflow to cope with the “new normal” where many people (ourselves, colleagues, portfolio managers, counterparty brokers, etc) have been working remotely. This has allowed us to reduce manual effort and reduce trading risk. Throughout the pandemic our volumes increased substantially, with notional turnover increasing 30% vs the prior year. The whole series of automation uplifts have delivered constant cost reduction, most notably by eliminating the manual handling of complicated workflow. Examples here would be irregular settlement, and the orders in some emerging markets that had previously been out of automation scope due to the complexity of the products. As of today, 60% of APAC volume by ticket is traded through automation, leaving the traders more time for value-added tasks.
How do you work with your internal technology teams?
Traders work with our global technology teams very closely. The recent innovative initiatives that JPM AM implemented such as automation, IOI scoring and liquidity sourcing would have never been realized without collaboration between technology, quants and trading teams. For traders, partnering with technology is essential. On a daily basis, we have close communication with our technology teams to continually monitor our systems and work on improvements. If we identify area of opportunity, we will raise these immediately to the global technology team, the team will then come back with a timeline. As such trading and technology functions as a well-organized structure so that there is always transparency for the ongoing projects and enhancements on our trading platform.
What is the future of buy-side trading in your opinion, ie what might be some important themes in a few years’ time?
I believe buy-side trading will shift further to quantitative and systematic approaches, regardless of the liquidity of the order. By leveraging data analytics, machine learning techniques, and streamlining interactions with the sell side across different channels, buy-side traders should be able to achieve unbiased execution. More specifically, industry-wide efforts should be the key in the next few years for buy-side trading in order to move forward from the current systematic trading framework. In my opinion, for the next step we will need something rational to support traders’ decision making in real time, such as real-time alerts about market/stock moves, alerts for potential liquidity/cross, and impactful signals for our working orders. Chat bots are a good example that can potentially play an interesting role in facilitating the above. If both buy-side and sell-side platforms can directly exchange information and feedback to buy-side traders with relevant real time alerts, the buy-side trader could achieve higher quality in the execution. I believe this type of industry-wide collaboration will bring more consistency in the trading world and thus will benefit both buy-side and sell-side with increased efficiency.