Examining the outlook for Asian trading

Murat Atamer joined Credit Suisse in Hong Kong in 2007. He is head of advanced execution services product for Asia-Pacific, responsible for developing the bank's suite of electronic execution products. Previously he headed the quantitative trading strategy team for Credit Suisse.

High frequency trading (HFT) and alternative trading venues are still at an early stage in Asia. How important are they as we move into 2011 and beyond?
It is clear that high frequency trading is here to stay in Asia-Pacific. Investors operate in increasingly crowded markets and are relentlessly searching for alpha. HFT and liquidity fragmentation – two dynamics that have long dominated the trading landscape in Western markets – can give investors an edge in execution and reduce their costs. That’s why they have taken a permanent place in the daily trading activities of many Asian investors.

For investors using electronic trading tools, it’s now more important than ever that algorithms have minimal signalling risk and prudent controls in place. Those who do not have sophisticated execution tools risk underperforming.

How much headway is HFT making in Asia, given the large number of markets and the frequently illiquid trading conditions?
We estimate that some 10% of trading in Asia-Pacific is now driven by HFT, although this is closer to 30% in Tokyo. It’s a small proportion in comparison to Europe, where we estimate that HFT accounts for 35% of total trading activity, or the US, where we estimate the figure to be 60%.

But HFT is growing fast. This has converged with rapidly increasing trading volumes in the region – since January 2010 alone, the number of shares traded in Asia ex-Japan each day has increased by around 60%. HFT growth has also been helped by Asian exchanges’ engagement in a technology arms race. Co-location facilities – where brokers’ trading servers are located in close physical proximity to the exchange servers to increase trading speeds – are now common across Asia-Pacific. The proportion of trading done through co-location services ranges from 30% in Tokyo to less than 5% in Hong Kong, but it has faced little regulatory friction and we expect this growth to continue.

It seems that alternative trading venues have been slow to catch on in Asia. Do you expect the pace of development to speed up?
Yes, steadily but surely. The lack of a single regulatory framework like that in Europe to drive this process means that it will take longer in Asia, but the benefits of liquidity fragmentation and competition between market operators are increasingly clear to market participants. You have seen Australia licensing new market operators, the entry of new players in Japan, and India allowing smart order routing (SOR) between its two main markets, so I think the outlook is quite positive.

Alternative venues are steadily gaining traction in Japan, which is the most advanced market in the region in this respect. As a proportion of total trading volume for Nikkei 225 stocks and Nintendo, one of the more heavily traded stocks outside the Nikkei 225 index, Japan’s proprietary trading systems (PTSs) have grown from around 0.2% of volume in January 2009 to 1.4% today. You can contrast this relatively small volume with London, where Chi-X alone had a 25.7% share of FTSE 100 trading on December 6, but the entrance of global players like Chi-X has definitely served as a wake-up call to Japan’s exchanges and the local PTSs, reminding them of the need to cut costs and improve efficiency.