JP Morgan Asset Management is upgrading its trading technology, with Lee Bray, recently appointed Asia head of trading, spearheading the efforts.
Bray moved to Hong Kong in April to head the firm’s Asia-Pacific equity trading desk after 13 years in its London office, and one of his first initiatives is to improve the firm’s technology. After reviewing the order management and execution management systems, the upgrade will take place next year.
Once the upgrades are complete, his team – 20-strong across Hong Kong, Tokyo and Taiwan – will be able to source block liquidity better, especially when trading blocks with sales trading desks of brokers. These brokers try to match the privately negotiated block trades through pre-trade messages – called indications of interest (IOIs) – sent electronically to their clients.
“Today traders are expected to execute much more flow going through their trading pad than, say, 15 years ago. Hence, it is important that we keep upgrading our technology to ensure that we are the first to see brokers’ IOIs," says Bray.
He has experience of such development – before moving to Hong Kong, he helped JP Morgan AM develop the infrastructure for its equities and derivatives trading desks.
These upgrades come as regulators in Asia are reviewing supervision on dark pools to determine whether there is a need to curb their use. Bray is sanguine about the potential outcome.
The ability to trade blocks has always been important for long-only institutions, he says, hence he has looked beyond dark venues when sourcing block liquidity via a number of venues.
The average size of dark pools is actually getting smaller, he says.
“While service providers that offer dark liquidity have been touting their capability in attracting block flows from investors, in reality the average trading size in these dark pools is actually not significantly bigger than those traded on public exchanges,” he tells AsianInvestor.
Research from the Australian Securities & Investments Commission (Asic) published earlier this year indicates a significant decline in the use of block trades in dark pools – defined as blocks of A$1 million ($895,738) or more – while smaller trades have been growing. From September 2010 through September 2012, the number of block trades has dropped by 69% to 10,000, while the number of block trades done below that size quadrupled to 2.6 million.
Regulators such as Asic and Hong Kong’s Securities and Futures Commission are now debating whether there should be restrictions placed on dark pool investors.
Research shows that price deterioration in stocks traded on public markets has led to more flows entering dark pools. This inevitably affects end-investors in a number of ways, including increasing bid/ask spreads.
To properly source block liquidity – especially among less-liquid Asian markets where foreigners often have reduced ownership rights – having a number of execution avenues is important, Bray argues.
“To navigate some of the more illiquid Asian markets, it is important to be nimble – to not limit my team to any one implementation strategy, but diversify into as many touch points with the market as possible,” Bray says.
His traders need to be have a variety of service choices, including facilitation, programme trading, high-touch sales trading and equity capital market trading, among others, he says.
Before relocating to Hong Kong, Bray helped JP Morgan AM develop the infrastructure for its equities and derivatives trading desks.
While equity market fragmentation in Asia is not as bad as in Europe or the US (there are 13 public exchanges and 50 alternative venues in America), he says local players could learn a lot from the two markets as Asia’s structure evolves.
Participants have said market fragmentation in the US is the key reason why American exchanges have had difficulty attracting liquidity. It has reached the point where some venues resort to relying on paying rebates to certain types of market-makers for trading on their platforms. This encourages more opportunistic trading and volatility across multiple venues.
*Lee Bray will be featured in the Trader Talk column in the September issue of AsianInvestor magazine.