Stephanie Lawton reports on the latest from the Face2Face Forums in Mumbai and Kuala Lumpur.
Few exchanges have seen such dramatic transformations as those in India. Technology looks set to play a major role in meeting market demands with the BSE announcing its adoption of FIX 5.0 and the NSE using FIX 4.2, with plans to upgrade to 5.0 as needed. Both the NSE and BSE seem determined to not only meet, but exceed their members’ expectations and have aggressive plans to build on existing capabilities and develop new products.
Bringing together the Exchanges
Three exchanges (NSE, BSE and MCX) came together to debate the role of technology, regulators and, of course, competition.
Jim Shapiro, head of market development for the Bombay Stock Exchange (BSE), stated that the ability of an exchange to innovate and stay ahead of the market, would be the key to its success. Correctly reading how the regulators may react to situations and evolve regulations in India would also be key, he added. Vidhu Shekhar, vice president of new products for the National Stock Exchange of India (NSE), agreed that keeping pace with market growth was essential. “You need to keep your eye on the ball,” he urged. “We need to recognise what’s going on outside India and decide how we, as an exchange, respond to the challenges and opportunities of globalization.”.
Latika Kundu, head of market operations for the MCX-SX, focused on the role of technology. “It’s about awareness of products on the market and how we ensure maximum accessibility to these new products,” she argued.
Looking at the progress of DMA and automated trading, the BSE felt the process was still in its infancy, with DMA still showing market constraints. However, algorithms were attracting a lot of interest from most market participants. New players, in particular, were ramping up this aspect of their technology and product offerings, with the BSE keen to attract these new market entrants.
On the subject of regulatory changes, all the exchanges agreed that the regulators had come a long way in engaging with the market and the exchanges. The main concern centered on systematic risk and in better understanding their clients’ requirement. On the idea of a MiFIDstyle system, the exchanges said that though the issue of best execution was being actively discussed, it still remained a complex issue. According to Shapiro, dark pools wasn’t high on the regulators’ priority list and block trading provoked more interest.
The Keynote – High Frequency Trading
High Frequency Trading as the New Market Makers was addressed by Ronald Gould, Chief Executive Officer, Asia- Pacific, Chi-X Global.
To start his presentation, Ron questioned whether High Frequency Trading is ‘bad’ or just ‘badly understood’. He gradually unfolded the story by looking at the development of HFT in the US and Europe in terms of regulatory evolution and the technology arms race. He also illustrated that an Alternative Trading System (ATS) has a positive impact on trading volume, which was reflected by the explosion of trading activity in Europe and in the U.S. He predicted that Asia-Pacific markets will undergo many of the same changes as the U.S. and Europe with HFT will playing a critical role in many existing Asia-Pacific markets with relatively low liquidity.
What are the major issues for electronic trading in India?
The major drivers were still the foreign institutional investors that were showing a strong appetite for algorithms, explained Murat Atamer, vice president equities, at Credit Suisse AES. “FIXatdl would be attractive to our clients,” said Atamer, adding that India was not a market that should be traded without algos.
Vinay Nayak, Senior Vice President for business management in global markets for Citi, believed that algorithms offered clients the best of both worlds. They could rely on both the brokerdeveloped algos and those customised specifically for them by brokers. Daiwa Securities’ Senior Product Specialist for capital markets, David deGraw, pointed out that in Japan, domestic brokers were handing out algorithms to retail investors. DeGraw said that Daiwa was looking at India in a similar light and felt this could be an approach that would work in this market.
On the issue of Smart Order Routing (SOR), Atamer saw it as a useful tool for price formation that could be applicable to India. DeGraw was concerned that the BSE and NSE were looking at SOR as an either/or issue, however, SOR can split an order across two exchanges and the local operators needed to take this into account.
What are the tech guys saying?
The good news, it appeared, was that the panelists have seen a significant increase in the investment in technical infrastructure and resources. From a technology perspective, exchanges in India were on par with their counterparts in some of the leading global market centres, driving an increase in algorithms, liquidity and price discovery.
The interest in ‘low latency,’ the buzz word over the past two years in Europe, was now moving into India, explained Rapid Addition’s CEO, Toby Corballis. The race to zero never ends, he declared.
Rajashree Thandy, Global Head of capital markets QA, Capgemini, pointed to her clients’ wish list that included flexibility and consistency. “Clients want to know how long it will take to trade so they can plan ahead.”
Wrapping up the discussion, PS Praveen, Transaction Network Services’ country manager for its financial services division, said his clients were looking for remote access, international quality algorithms, free access across exchanges and ‘the holy grail’ of milliseconds to microseconds at domestic exchanges.
And finally to the buy-side …
As always the buy-side debate was the perfect end to the day. Both Viresh Joshi, chief trader equity at Axis Asset Management and Vinoth Ramakrishnan, senior trader at Sundaram BNP Paribas, informed us that getting live updates from most of their brokers had made life more efficient, reduced errors, improved the timeliness of news and the pace of execution. Both also agreed on the interest level in algorithms being higher than ever, with anonymity proving as popular with domestic players as with international firms. The traders highlighted how approximately 15 percent of their trades were now executed using algorithms, with pre-trade analysis helping to establish an algo trade.
A key question for the buy-side firms was on what technical improvements were they looking for in the market. Ramakrishnan pointed to SOR; the ability to trade on the BSE and NSE based on best price; better pre-trade analysis; TCA; and (in a perfect world) event-driven algorithms.
Multi-asset class trading and more efficient execution were among Joshi’s priorities for technology development. Both vehemently agreed that India was definitely not close to being saturated with electronic trading providers. The key, they asserted, was that risk management and competition between providers would advance the market towards the goal.
The FIXGlobal Face2Face forum returned to Malaysia this year, once again with the support of Bursa Malaysia, a telling sign of the involvement of the Exchange in the use of FIX as a standard and being at the forefront of innovation in the region. With over 140 delegates attending, the trend was clear, that participants from the local Buy-side, Sell-side and Vendor communities had upped their interest in how Electronic Trading and FIX as a standard could optimize their businesses. This development was very encouraging, especially in a market that is in relative electronic trading ‘infancy’, possibly “Only a third of the way up the curve, in comparison to the US and the UK,” as First Derivatives’ Rob Hodgkinson put it. The upside is clear with the community wanting to know more about how to become involved.
International competition has arrived in Malaysia and the Exchange underlined this to the delegates, with Mr. Chua Kong Khai, Deputy Chief Market Operations Officer and Chief Information officer Mr. Lim Jit Jee giving their updates on DMA, co-location capacity, the ASEAN Link (a cooperative initiative across 6 ASEAN exchanges) and Bursa Malaysia’s partnership with the CME on the Globex platform.
- DMA was launched for Derivatives in March ‘08 and for Equities in November ‘09 and even though the exchange is currently seeing volumes only on the derivatives side, the growing demand for lower latency should see the uptake accelerate on the equities side.
- The exchange informed the industry that they have 4,000 square feet allocated for colocation with room to expand.
- The ASEAN Link opens up new trading opportunities such as, direct access to trade on different ASEAN exchanges and acts as a local sponsor for inbound business from regional and global brokers, as well as for global buy-side.
- Finally, the migration of Bursa Malaysia in the 4th quarter of 2010 to CME’s Globex platform will open up the global markets to the local participants.
As these advancements were outlined, alongside other perspectives from the sell-side players, Face2Face’s Buy-side delegates gained greater insight into market development. This was highlighted when a number of buy-side members of the audience expressed their industry perspectives and hopes, for the future.
With the exchange helping to lead the way in the implementation of strategies, technologies and infrastructure, which will enable the Malaysian market to grow, the question turned to the current impediments in the domestic market, in comparison to the international markets. The cost of trading, lack of understanding about the benefits of electronic trading, legacy policies and regulation were highlighted as key. Azura Azman, Head of Equity Broking Division at RHB Investment Bank, and Lim Jong Hau, Head of Equity Derivatives Group at CIMB Investment Bank, agreed that increased understanding of DMA and the deployment of algos to reduce latency and enhance institutional anonymity is starting to address these issues, along with a supportive relationship with the regulator, who is fully engaged with market participants and open to addressing the requirements of the market.