Lion Global Investors is not yet using the new Shanghai-Hong Kong Stock Connect to trade mainland China stocks, largely because shares must be transferred to brokers at least one day before sale.
Monica Tan, head of dealing at the Singapore fund house, provided further evidence of why many long-only asset managers and institutional investors are not yet participating in the trading link.
In an interview with AsianInvestor, she also voiced strong views on high-frequency traders and said she was becoming more selective about the brokers her team uses.
The fact that Shanghai requires shares to be transferred to brokers at least one day before sale is an issue for a number of reasons, said Tan. “This would not only make the settlement non-DVP [delivery-versus-payment] and thus increase settlement risk, plus we also risk revealing our intention to the market. “
Non-DVP refers to trading where a custodian has to release payment or deliver securities on behalf of the client before there is certainty that it will receive the counter-value in cash or securities.
Moreover, this requirement restricts fund managers’ flexibility to make a decision to sell a stock on T day, said Tan. In the case of buy trades, there is also the problem of the tight timeline for FX conversion, she added, as funding of trades has to be done on T day immediately after the Chinese markets close.
“In terms of trading, we face the uncertainty of the order not being filled when the daily quota is full. It is also mandatory to put a price limit on trades, and there are restrictions on changes in price limits.”
Unless and until China liberalises the financial market and the renminbi becomes fully convertible, such limitations will remain, said Tan. Nevertheless, she expects the scheme to continue to expand.
Meanwhile, Lion Global has a licence under China’s renminbi qualified foreign institutional investor (RQFII) scheme and is in the process of getting its RQFII quota.
Separately, Tan envisaged the firm’s range of broker relationships shrinking as the team became more selective over counterparties.
“We want to reward brokers that score well with us in a meaningful way, so we do not want to spread the business too thinly,” she said. “Therefore, brokers will have to improve their quality and be able to differentiate themselves from others.”
With brokers facing margin compression and with more buy-side unbundling their trades, she added, the industry could also face consolidation pressure and attrition in the longer term.
As for other methods of sourcing liquidity, Tan is continuing to review the benefits of using trading algorithms and dark pools – the team does not yet use either.
Asked her view on high-frequency traders, she was unequivocal: “HFTs’ ability to obtain pricing information fractions of seconds earlier and trade ahead based on those information gives them an unfair advantage.”
This not only boosts the cost of trading for regular investors but it can also result in market instability, she said, citing as an example the so-called flash crash in US stocks in May 2010.
“With HFTs increasing their market share of total daily volume, regulators will need a tighter regulatory framework to control their activities to prevent abuse as well as level the playing field.”
She is certainly not the only buy-side executive with such views.