Co-lo Shows HFT Appetite for New Venues
Intro: At a webcast held on the 26 March, Asia Etrading discussed the opportunities and costs that face new exchanges and markets launching in Asia.
The launch of new trading venues is being welcomed by traders, looking for cheaper execution, however conservative regulators and well-ensconced incumbent exchanges in many Asian markets are proving difficult to overcome.
Jason Keady, director market & operations of Chi-X Australia says that sell-side support has been positive, and that the venue is heading towards a steady 2% of market share.
“On the first day of trading we had 22 trading participants who accounted for over 85% of trading in ASX turnover,” he said. “That was the largest number of trading participants that have been in place at a Chi-X launch globally.”
Japan saw competition start in 2010 when TSE launched the arrowhead trading platform and Japan Central Clearing, the post-trade utility opened for use by the Proprietary Trading Systems (PTSs). Those fundamental changes opened the gate to competition. PTS market share was less than 1% at that point.
“Just 18 months from our launch, PTS market share is more than 5%,” said Yasuo Hamakake, representative director of Chi-X Japan.
The Hong Kong Mercantile Exchange (HKMerc) is building a new marketplace to capture some of the order flows coming into Hong Kong from mainland China and from the major Chinese banks, brokers and trading companies who have offices in Hong Kong. Where the Chi-X model is to compete with an established incumbent, HKMerc is offering an entirely new proposition.
“It is the inside out play, if you will; our position in Hong Kong is to help them participate in the markets here and abroad as well as being in place for the international participants,” said David Day, head of marketing at the HKMerc. “Getting people to sign up for that is a continuous challenge. The costs to join an exchange can, on a relative basis, be significant. Joining a new exchange for both large and small firms is a challenge, especially when not every firm has a business model or strategy to be a member of every exchange.”
Nevertheless, David Wilkinson, senior director, business development at trading infrastructure provider Equinix, observes that introducing alternative venues and different ways of trading encourages investment into the Asian markets.
“From our perspective we see it as very positive and we do expect to see further advancements along that line,” he said.
Keady notes that support is not just for the offering of the new venues themselves, but for the effect that competition and innovation delivers in the market.
“While there are costs in joining new markets there’s clearly strong demand in support of competition,” he said. “Just before we launched, the incumbent ASX reduced its trading fees by 50%, and some while before that they had reduced them in anticipation. The fall in trading costs and the innovation that the ASX has tried to introduce in the last two years is probably more than it has in the last 20 years. That in itself has created strong support within the industry.”
The price improvements that firms see by trading at different venues, with technologies such as smart order routers enabling opportunities for arbitrage, are benefits that firms cannot realise without the cost of connecting to both venues, particularly for high-frequency trading (HFT) firms, for whom it is a cost of doing business. HFT is growing in volume across the region, lending valuable support to new venues.
“Right now the TSE sees 32% of flows coming from colocation services which may indicate an HFT factor,” said Hamakake. “HFTs are active users of venues like us. I believe the number is increasing and we are targeting diversified flows from the market, so we want to make sure every participant is entering our marketplace and picking up benefit from our services and solutions.”
The HFT community outside of Asia is well versed in playing across multiple jurisdictions or markets and finding the different liquidity pools for arbitrage and hedging, which is leading to a boom in co-location requirements, says Day.
“When we speak with HFT firms and people who are co-locating in our systems, the things we see are that they need access to multiple geographies, they want to get as close to the system as possible but then at the same time they need to consider where they are getting data for the other markets that are open at the same time as us,” he said.
“Clearly there is an HFT arms race and some markets in Asia are more conducive to those strategies than others,” added Wilkinson. “But I’ve seen surveys that suggest less than 15% of firms live or die on being the fastest; others take ‘smarter’ strategies to execute their trades across the region.”
On the back of ongoing economic concerns, trading volumes are low – turnover on the Shanghai Exchange was US$318 billion in March 2012, down from US$561 billion in March 2011 – meaning that even with HFT flow, new venues have a tough market to crack.
Nevertheless, Hamakake believes that there is still room for more competition, in the Japanese market at least. However he observes that new entrants must face a level playing field with incumbent markets and that will require regulators to even the balance.
Listen to the Webcast Here