The increased frequency of ‘flash crash’-like events in Asian equity markets has highlighted the importance for traders to better understand market microstructure, argues Chris Seabolt of Fidelity Management & Research (FMR)*.

Given the increased complexity in Asian markets in recent years, FMR's team of seven traders in Hong Kong has made a significant commitment to quantitative analysis and market access technology, he says. (FMR, the $1.6 trillion Boston-based mutual fund arm of the Fidelity group, set up the Hong Kong trading desk last March.)

“In Asia, we have been proactive in working with industry groups around important market microstructure topics like circuit breakers, dark pools and electronic trading best practice,” notes Seabolt.

The Hong Kong team also relies heavily on analysis done by FMR's four quants in Boston, which helps it measure market impact that could act as a drag on transaction performance. The quant team provides useful analysis on traders’ execution performance across a broad spectrum of execution capability, says Seabolt.

He also places strong emphasis on the Hong Kong-based traders providing local colour to the portfolio managers.

“We spend a lot of time focusing on our relationship with our global investment team,” notes Seabolt. “Getting our trading process right is very important, but we also weigh heavily the importance of building a strong feedback loop with our portfolio managers and analysts.”

To improve execution performance, Seabolt says his team has been doing a lot of work on measuring market impact and understanding the venues it trades on.

“We think of different trading venues in terms of a liquidity cascade, where there are different layers of toxicity,” he notes. “As part of this, we have focused on optimising our electronic platform to ensure we have the best algorithms which interact intelligently with liquidity across venues.”

Moreover, bourses and regulators are continuing with developments designed to reduce the likelihood of flash crash-type events and improve investor protection generally.

Singapore Exchange implemented a 'circuit breaker' at the end of this month with a view to preventing sudden price spikes caused by aberrant algorithms or ‘fat finger’ errors by halting trading after a certain price rise or fall is hit. 

And Hong Kong’s Securities and Futures Commission is consulting on implementing a supervisory framework around dark pools, although brokers have voiced concerns about the proposals, as reported.

Such measures are, in part, Asian regulators’ reaction to flash crash–type events such as one in India in October in 2012, when a fat-finger error by a trader at Emkay Global Financial Services caused a sudden 15% drop in the Nifty index. The National Stock Exchange halted trading briefly as a result.

In the US, the original flash crash in May 2010 caused the Dow Jones Industrial Average to drop by about 9%, only to recover these losses within minutes.

*An interview with Seabolt will appear in the ‘Trader Talk’ column in AsianInvestor’s upcoming March issue.