Alternative trading venues should start to gain decent traction once they can settle and clear through Japan Securities Clearing Corporation (JSCC), says Glenn Lesko, Asia chief executive at agency broker and e-trading platform provider Instinet in Hong Kong.
ATVs -- or proprietary trading venues (PTSs), as they're known in Japan -- haven't so far flourished in Japan as they have elsewhere, both as a result of the inability to clear through the JSCC and because the PTS licence doesn't allow non-displayed order types, such as dark orders, adds Lesko. But that should change once JSCC clearing is permitted, as is expected in July, he says.
Instinet expects trading platform Chi-X will launch in Japan later this year, says Lesko. When Japan has alternative venues such as those in the US and Europe, volumes should really start to pick up, he adds.
However, Instinet is less upbeat on the situation in Hong Kong. It's very easy to cross a trade onto an exchange for clearing and settlement once it's been executed, says Lesko, allowing internalised dark pools to flourish.
The issue for these venues is that the integration between the exchange, clearing system and settlement system creates a monopoly, says Lesko. Hence, Chi-X, Turquoise and the like can't operate in Hong Kong unless they put their flow through an exchange participant broker and then settle and clear on the exchange -- and that's just not cost-effective, he says.
Beyond Asia, there have been noises from regulators in Europe and the US looking at ATSs and, more specifically, proposals by the US Securities and Exchange Commission on treating actionable indications of interest (IOIs) as quotes and subjecting them to the same disclosure rules. The SEC is also talking about lowering the ATS trading volume threshold for displaying best-priced orders, and requiring real-time disclosure via public reports of executed trades on dark pools and other ATSs.
Asked how concerned he is about these proposals, Lesko says it's not his place to talk about them; that would be something for his US-based colleagues to discuss. "In Asia, we're so far from that situation [in the US]," he says. "We haven't even come close to having some of these things in Asia -- flash order types don't exist here, for example.
"We're the last mover, so the regulator will have had chance to look at what happens elsewhere in world before making any decisions," he adds.
One area where Lesko feels more progress should have been made in Asia is best execution. When he moved to Hong Kong last year to run the regional business, he said he expected buy-side traders would be using more execution-only services and unbundling. But things haven't developed to the extent he had hoped.
"[Investors are] accessing faster markets and multiple venues," Lesko says. "[Best execution] is extraordinarily relevant to recent events -- you don't want just good speed and access, but also good risk management."
"End-users have the right to get best execution," he adds, "but execution in Asia has been based on research, corporate institutions and so on -- not on best execution. It's now as important as ever and I'm not pleased with the progress on it."
In Australia, best execution is considered, but broker choice is more typically based on various factors including research and corporate introductions, and it's illegal in Japan, he says. However, regulations are likely to change in Japan to make it possible, following the launch of Arrowhead. Moreover, Australia will publish a paper on best execution in July, and Hong Kong has a "vague paper" on this, says Lesko.
Regulators should take the initiative of insisting on best execution for its benefits to end-users -- super funds, for example, and their members or the employees whose money is in the corporate pension scheme, he adds.
Meanwhile, when asked about whether the May 6 computer glitch -- which resulted in major stock-market drops -- has harmed the reputation of algorithmic trading, Lesko says: "If the right information is out there, I'm not sure it should."
"A plane crash is a tragedy, but it doesn't make people think we should go back to using the horse and cart," he adds. "Better and faster technology to help investors implement their strategies is a good thing, as most people at the Fix Protocol Asia-Pacific Trading Summit agreed, only a few days after the glitch."
Lesko argues that volatility has in fact trended down as markets have become more efficient and faster, and participants such as high-frequency traders (HFTs) have come in. "You can have volatility when people are writing on chalkboards too; it just happens faster now," he says.
"Almost every high-frequency trading strategy is an efficient arbitrage strategy or an outright sale of volatility," adds Lesko. "On [May 6], people who sell vol for a living probably had to get out of their positions. They got out of the market because it was scary for them too."
"Some people estimate HFTs now account for up to 70% of trades in the US," he adds, "and 99.9% of the time they reduce volatility, but on days they disappear, volatility spikes."
Lesko cites the Vix index as showing that there was a continual down trend leading up to the market collapse in September 2008, before recording a spike on the collapse, then trending down again.