Amid the pitches and yaws of Asia’s stock markets over the past year, the ability to execute stock trades fast and efficiently has become a core priority.
China’s equity market plunge in June last year in particular caused trading levels and volumes to wildly shift in the subsequent months. Amid such chaos, an inability to trade out of positions quickly amid times of market stress can leave investors in real trouble.
Hong Kong’s stock market provides a perfect example. While the Hang Seng Index was only 7% lower at the end of 2015 than at the start of the year, it plunged 21% from its peak at the beginning of May to the end of December. The index then fell 6.5% from the start of January this year until mid-June.
This is reflected in trading volumes. The average daily turnover of the Hong Kong stock exchange stood at $125 billion for the first six months of 2015, but by the end of the year had fallen to a daily trading average of $105 billion.
During times of such stress, the ability to source liquidity and trust your brokers is paramount, apoint underlined by AsianInvestor’s latest trading and execution survey of the buy-side.
Asian stock markets have proven very tricky to negotiate this year, with the region's emerging markets in particular proving range-bound, still quite highly valued and not considered flavour of the month by global fund managers. In such conditions, the ability to quickly take advantage of pricing disparities was important, particularly for investors seeking to conduct big block trades.
As a result, access to liquidity continued to stand out as the number one broker requirement for 19% of buy-side respondents. This was followed fairly closely by trustworthiness, with 16% of the vote. It’s just as important for brokers to be able to trade in and out of positions quietly without impacting the underlying stocks as doing so quickly and in large size.
While it’s become increasingly important for funds to locate and work with brokers they can trust, they remain extremely frugal when it comes to paying them.
In total, over one third of respondents said their commission pools for brokers had shrunk by over 10%, and another 10.5% said they had declined between zero and 10% (see figure 4, third and final graph on the left). All told, only 25.9% had increased the pool by some degree. The industry’s margins continue to fall.
Meanwhile, the industry continues to consolidate among the largest players. Around four in 10 respondents said they were concentrating commission pools with their top three broker relationships, versus 29.6% saying the sum had actually become spread among more players.
The ability of brokers to offer good market access is important – indeed, some one-third of long-only respondents considered it the most important reason to consider changing counterparties.
The good news for brokers is that voters tend to be conservative when it comes to shifting their business; 55% said they only occasionally changed counterparties, and 24.1% said they never did (see figure 2, first graph above). Once brokers develop a trusted relationship, it tends to stick.
Respondents were largely in favour of commission-sharing agreements. A narrow overall majority (53.8%) said they used CSAs and would keep doing so, while 34% had no intention of doing so.
The pressure to share commissions is growing as investors seek to combine top-notch execution with superior research and after-sales services.
Look out for part two of the survey in the coming days, to discover the winners of survey categories. Note: not all graphs are included; they can be found in the full feature, which appears in the June issue of AsianInvestor magazine.