Talks are under way to set up an electronic trading association in Hong Kong in response to a consultation being conducted by the securities regulator with a deadline of September 24.
The aim is to set up a cross-industry body that does not support vested interests, says Philip York, chief executive of hedge fund firm Alt 224, who is working on the initiative. Involved parties include exchange executives, brokers, software vendors, buy- and sell-side traders and market-makers.
“We’re looking to create a common voice to speak to regulators to help the industry move more towards self-regulation,” says York, whose firm specialises in automated trading of exchange markets and foreign exchange using purely quantitative models.
There are other associations in Hong Kong involved in lobbying on trading industry issues, but none dedicated to electronic trading issues, he notes.
York envisages the territory's Securities and Futures Commission acting like a third-party auditor overseeing the industry on behalf of the participants, to ensure the market works with integrity. “Industry participants, as well as regulators, need to be better educated about each other’s nature and function if we are all to work together for the common good."
He cites the example of ‘screen traders’, which he argues don’t carry out quantitative modelling and therefore may not understand the nature of market microstructures. “So if an exchange asks these guys for their opinion, they don’t necessarily understand all the issues to be able to provide meaningful comment.”
“This is one of my biggest bugbears at the moment,” says York, who has been trading for over 25 years. “We actually want the smallest minimum tick size possible. Some traders who haven’t modelled market structure believe they need a larger minimum tick size to ensure a minimum spread, but minimum tick sizes just ensure a minimum loss if the market is going against you, not a minimum spread.
“Market spread should be determined by whatever market-makers choose – i.e. the free market – not by exchanges,” he adds. “Small minimum tick values improve market efficiency because they allow traders more incremental losses if the market is moving against them.”
By the same token, argues York, there is no longer any reason to set minimum lot sizes in equities. Brokers in derivatives also naturally push for smaller contracts to increase turnover, he says, but that can mean contract sizes end up being too small.
He points to the Bombay Stock Exchange as being a market with decent local volume, but one that needs bigger contracts if it is to attract more foreign traders. Brazil's Bovespa has the same issue, adds York.
“I’ve spoken to buy-side traders, brokers and exchange executives,” he notes. “There needs to be a balance between us all. All the participants are symbiotic; we all have to work together to create and manage the products. We need to put a concise and consistent view to the regulator so we can have an efficient market.”