Institutional agency-only broker Instinet expects more talk than action this year when it comes to any structural change in the pan-Asia electronic trading market.
Last January the Tokyo Stock Exchange enhanced its technology infrastructure with the introduction of the Arrowhead platform, and exchange groups including those in Hong Kong, Singapore and Australia announced plans to follow by upgrading their systems.
But Alison Crosthwait, Instinet’s director of global trading research, notes that while Japan has a robust group of competitors in place already and more on the horizon, the challenges that the broader region faces are likely to stymie near-term development in Asia.
She points out that the big money in Asia is in the Chinese IPO market, which drives global investment, not e-trading. Also, the relative distances between the four major Asia-Pacific trading centres (Tokyo, Hong Kong, Singapore and Sydney) make fibre-optic interconnectivity more expensive and allow for more system latency. Plus, the varying national interests of a culturally diverse region such as Asia complicate mutual cooperation among parties.
“Since no catalyst such as a pan-regional regulatory overhaul appears on the horizon, we predict 2011 to be a year of more talk than action,” says Crosthwait.
Further, Instinet predicts that Brazil will beef up e-trading, with BVMF – the country’s securities, commodities and futures exchange – having successfully courted high-frequency-trading groups over the past few years.
“Given Brazil’s relatively low amount of per-capita investing and high expected economic growth, 2011 will likely bring a continued build-out of the sell-side’s electronic offerings,” adds Crosthwait, who expects to see more next-generation algorithms emerge.
She also believes debate about the safety and sustainability of exchange-traded funds (ETFs) will quickly recede and they will be seen to be well-hedged and stable products, although she concedes that retail investors could be better educated about leveraged ETFs.
She does expect a more complex, global debate about the impact of higher correlations between global equities, which some attribute to ETFs. Similarly she anticipates more heated debate in 2011 over the complex role of exchanges.
“For example, the exchanges’ clearing and data businesses are often labelled anti-competitive when not made available to alternative venues and market participants at reasonable cost,” she notes. “Yet at the same time these businesses represent significant sources of both revenue and competitive advantage for the exchanges’ shareholders.”
Crosthwait notes Goldman Sachs’s recent announcement that it intends to use NYSE Euronext’s technology for its new multilateral trading facility in Europe.
“It will be interesting to see if additional deals with major brokers are in the works, and whether quid pro quo liquidity provision arrangements are part of these agreements,” she adds. “In this vein, equity exchanges may look to derivatives exchanges as valuable partners.”
Separately, Instinet lists five areas that could see regulatory amendments and clarifications in 2011: dark trading minimum size thresholds and post-trade transparency; HTF minimum quote duration, pricing for message traffic versus trades, market-maker responsibilities and the allocation process for co-location; a move towards centralised clearing and inter-operability; market data availability and cost; and risk controls and disclosures around algorithms.
Crosthwait notes that comments on the European Commission’s markets in financial instruments directive (Mifid) II proposals are due back next month, with a commission proposal for amending the level 1 Mifid expected to be issued as early as May. The Securities and Exchange Commission’s concept release on market structure is also expected to be reformulated in 2011.
Meanwhile, Instinet anticipates there will be a slowdown in new equity trading venues in the US and Europe as the industry considers what optimal markets should look like. While it does not expect the number of broker-owned alternative venues to decrease, it does forecast consolidation of the independents in Europe and the US, particularly if volumes remain stagnant. In Asia, Latin America and Canada, however, the number of market venues should upswing.
Crosthwait also expects the cost of operating as an HFT to increase over the near term, with regulatory changes including the imminent ban of naked access in the US, as well as other changes on the horizon globally (such as co-location redistribution and messaging traffic charges).
She suggests that smaller firms that are unable to absorb the costs will likely drop out, and predicts further consolidation of boutique brokerages in 2011, if current market volumes persist.
“In addition, the Dodd-Frank Financial Reform legislation’s anticipated impact on banks’ proprietary trading activities will likely bring a fairly sizeable group of HFT-savvy individuals to the market,” she adds. “Watch for large HFT firms to get larger in 2011, with one or two new players emerging as significant participants.”