Exchanges in Hong Kong, Japan and Singapore have lengthened their trading hours in recent months to attract greater liquidity and volume. But such moves will not be sufficient to achieve their aims, argues agency broker Instinet in a report to be released today.
The central issue is a lack of competition among trading venues of the sort seen in Europe and the US in recent years. Without true competition – for both execution and clearing – exchanges have no incentive to build low-latency infrastructure, reduce fees or create an efficient market structure.
Hence the other problems to address largely stem from lack of competition. High clearing costs, trading fees, slow infrastructure, regulatory constraints and inefficient market structures all contribute to Asia-Pacific’s relatively low trading volume.
Moreover, while Asia-Pacific trading value has increased in the past decade, the velocity of trading has not, notes the report's author and Instinet's Toronto-based director of global trading research, Alison Crosthwait.
Leading the pack in terms of trading value growth is Hong Kong, with Hong Kong Exchanges and Clearing (HKEx) turnover increasing more than eightfold since 1996, says the report. But that's chiefly because of China’s rapid economic growth and the number of Chinese IPOs in the territory.
And HKEx, which has been vocal in its criticism of dark pools, is furthest behind global exchanges in terms of opening its market, says Instinet, which owns alternative venue operator Chi-X Global.
"I don't think increasing trading velocity is HKEx's biggest priority," Crosthwait tells AsianInvestor. "They are experiencing massive growth on the issuance side and have not shown a great deal of interest in the trading side – cancelling closing auctions for example. I don't see any real focus on the cost side until China slows down, which is likely a few years out at a minimum."
Instinet cites constraints in Hong Kong such as: very high clearing costs of 20 basis points; low capacity, high latency and a slow market data feed compared with similarly sized exchanges; stamp duty of 12bp with no exemption for market-makers; a relatively high proportion of retail investors; and the abolition of a closing auction in 2009.
Crosthwait also points to the lack of anonymity on HKEx, where orders and trades are identified by broker. “Since its open was made a half hour earlier and its lunch break a half hour shorter on March 7, many traders have found their attention split between Hong Kong and Singapore, making it more difficult to obtain quality fills,” she writes. “It remains to be seen if this difficulty is merely early growing pains or a larger structural issue.” (The plan is to further lengthen hours in March 2012.)
Still, Hong Kong is unlikely to lose out on revenues to other exchanges if the Chinese IPO pipeline continues, she adds. "There will be pressure for them to stay up-to-date, but while the issuances are steady, they will be fine," says Crosthwait.
Turning to Singapore, the main issues are a lack of competition and high clearing costs of 4bp, with a maximum charge of S$600 ($475) per trade, which are paid by the investor, not the broker.
However, Instinet notes, the Singapore Exchange – which is awaiting the outcome of its proposed move to merge with the ASX – has lobbied the Monetary Authority of Singapore to lower these costs.
Infrastructure has also been a constraint, but SGX has partnered with Nasdaq OMX to develop a new trading platform, SGX Reach. This will greatly improve the latency, capacity and scalability of the exchange's platform, says the report. That said, the Sydney-based ASX has had stability issues after rolling out the technology late last year, notes Instinet.
Both volume and turnover have increased in Japan, largely due to the existence of competition – between both exchanges and proprietary trading systems (PTSs) – and fair access to a central clearing counterparty. The introduction by the Tokyo Stock Exchange of its Arrowhead trading engine in January 2010 has cut order-response and data-distribution times dramatically.
There remain constraints, however, including rigorous PTS licence requirements, little onshore trading due to onerous regulations, reluctance of domestic investors to support alternative venues, lack of recognition of commission-sharing agreements by the regulator and tender-offer-bid [TOB] rules limiting stock trading by PTSs.
SGX knows competition is coming and is working to stay ahead of the curve, says Crosthwait, and the same is true of the TSE, as is shown by the introduction of Arrowhead. "TOB rules will be the big one [to address] as well as other trading rules," she adds, "and I would imagine these will be addressed over the next couple of years."
Meanwhile, Australia already has a continuous trading day, but the ASX has recently added new order types, announced a new infrastructure build and plans to launch a new market – PureMatch – later this year. “Australia is a prime example of the prospect of competition spurring the development of trading infrastructure,” says the report.