In light of the volatile markets of the past few quarters, Fullerton Fund Management's dealing team has been spending more time looking at behavioural finance and argues that global rules for high-frequency traders are needed.
“We try to understand things like risk-aversion theory, fear and euphoria underneath technical indicators,” says Darren Tay, head of trading at the Singaporean firm, which manages money for sovereign wealth fund Temasek along with mutual funds. This analysis will, in the long term, lead to a better understanding of high-frequency traders (HFTs) and their engines, he adds.
HFTs are the “new demographics in the financial markets”, he argues, and studies show they are becoming “major players”. For example, industry estimates suggest that HFTs may now account for 30-40% of trading volumes on some Asia-Pacific exchanges.
It will be very interesting to watch the HFT sector in the coming quarters, says Tay, in light of the evolution of Europe’s Mifid II rules, the potential that HFTs will have to register with the US Securities and Exchange Commission, exchange co-location and the race towards zero latency on exchanges’ gateways.
HFTs are expected to be good for exchanges, by providing more liquidity and introducing more market participants to the pool, says Tay. “But it’s too premature to conclude that HFTs are greatly helping large institutional participants in attracting new capital inflows and assets to Asia-Pacific."
“There is no unified global oversight of HFTs, and we’d like to see this at some point,” he notes. "As the market goes global, this will become increasingly necessary.”
Two other things that concern Tay at present are market fragmentation and changes in market microstructures. “Both will put pressures on buy- and sell-side traders,” he says.
"Asia-Pacific markets are fragmenting at both the exchange and broker level," notes Tay. "At the exchange level, we have seen more people talking about getting connected to venues like Chi-X, Chi-East and [Japan’s] SBI, and in Japan these alternative venues are taking about 5-10% from the primary exchanges."
Brokers have also been fragmenting in the past 18 months or so, he adds, with more sell-side firms – such as Jefferies, Religare and Renaissance – setting up brokerage units in Hong Kong and Singapore. Flows will become more sporadic as a result, says Tay, and buy-side firms risk working with a longer list of brokers.
Meanwhile, market microstructures are changing fast, he adds. “One thing that caught my attention last year is the extension of trading hours in Hong Kong, Japan, the Philippines and Singapore.”
All these issues have led Tay to scrutinise behavioural finance more closely in recent months – that is, studying the trading process and how assets exchange and react to each other in a financial market. "For an institutional trader," adds Tay, "it is about managing and understanding risk parameters such as timing risks, market liquidity, volatility and spread costs."
*For more from this interview about Fullerton's trading strategies and set-up, see the forthcoming (March) issue of AsianInvestor.