The ASEAN Trading Link Explained
The ASEAN Trading Link is expected to go live this month after 5 years of planning with Bursa Malaysia (BMB) and the Singapore Exchange (SGX) initiating the first tie. The Stock Exchange of Thailand (SET) is scheduled to comprise the next link in the third quarter after they upgrade their matching engine and infrastructure.
The collaboration is something of a milestone and is widely viewed as the first steps of a pan-Asia trading community to mirror that of Europe under MIFID. The compact comprises 7 exchanges in 6 countries boasting more than 3,600 companies. The BMB, SET and SGX represent approximately two-thirds of the US2.0 trillion market capitalisation of the seven members of the ASEAN Exchanges. The remaining four bourses are the Hanoi Stock Exchange (HSE), Hochiminh Stock Exchange (HOSE), the Indonesia Stock Exchange (IDX) and the Philippine Stock Exchange (PSE). The seeds for the initiative were sown during the 12th ASEAN Summit held January 2007 where members had agreed to accelerate integration and trade into and amongst the community by 2015. The goals of the ASEAN Economic Community are threefold:
• Promoting ASEAN as an asset class to global investors
• Lower the funding cost for listed companies
• Improving trading efficiency and lower trading cost locally and abroad
The long road has inevitably encountered some bumps along the way. Initially, NYSE Technologies was contracted to provide the network infrastructure as an extension of its Secure Financial Transaction Infrastructure (SFTI) network and also to provide connectivity to the respective exchanges within the Link. After 30 months of requests for proposals and three new CEO’s arriving to some of the ASEAN exchanges a business case for the Link couldn’t be justified. By this point, after much time and energy, NYSE Tech dropped the project. Not long after, however, SunGard stepped in to offer a solution that both provided support for the network and gateways but also the trading, post trade and risk software as well. After many hours of development, testing and more testing the ASEAN Trading Link is almost a reality.
How Does It Work?
The ASEAN link is comprised of a fibre network, known as the Intra-ASEAN Network (IAN) connecting each of the exchanges at a hub through a gateway. Each segment of the network has been built by local providers in each of the respective countries but owned by the ASEAN members and managed entirely by SunGard. The connection to the hub is referred to as the ASEAN Common Exchange (ACE) interface. The ACE is the point at which the local broker and the local exchange will be connected. You might be asking isn’t the local broker already connected to the exchanges own API? Yes, they would be but in order for the local broker to send and receive trades to the Link partners they must be connected via the ACE. Each ACE is housed in a data center either collocated with the exchange as in the case of SGX or within close proximity to the exchange at a telco.
Broker A, the Originating Broker (OB) is in Kuala Lumpur and has just received an order to buy 100,000 shares of Capitaland in Singapore. The order can be received over the phone or electronically as long as the broker routes the order to the ACE at Bursa Malaysia which could be by a dedicated connection or over the internet. Once the order is received at the ACE it is then sent through the IAN where it is then received at the SGX ACE and then continues to the exchanges matching engine. Each acknowledgement, change, cancel or fill report is sent back along the SGX ACE over the IAN back to the BMB ACE then back to the OB where the client can then report the trades to her client. Orders are not sent via the Sponsoring Brokers (SB) infrastructure, rather order messages are tagged with the SBs ID when the OB sends the order.
There is one other means of connecting to the Link referred to as the Neutral Access Point (NAP). Located in Singapore, this gateway will serve international clients seeking to connect directly into the Link. Like the ASEAN participants these firms will also need to have an account with a custodian and or an executing broker in each of the respective countries they plan to trade in. Access to the NAP can be by dedicated connectivity or via the web.
The messaging standard throughout the link is SunGard’s but there is a FIX 5.0 adapter available allowing for some measure of vendor neutrality. Because of the availability of FIX, sell side algorithms can be offered to clients. Additionally, SunGard’s Valdi Trader front end can offer a suite of algos via their Tactics server providing for clients the ability to slice up large orders too. Market making is also possible via SunGard Rubyx but given the latency constraints of a network versus colocating at the exchange we’re not likely to see much cross-border market making over the Link.
Risk is affected by SunGard’s Selector product. Here, the SB assigns firm level restrictions to the OB such as equity limits, position limits and fat finger limits. The sponsor will also be allowed to view and cancel trades. The OB, under the firm level limits, will then provide risk limits to each of their clients applying the same limit types found at the firm level. The OB will also be allowed to view positions and cancel trades but only those under the firm ID as provided by the SB. The key point is that the broker in the home country where the securities are executed bares the risk of the trade and sets the risk limits of the originating broker in aggregate. Of course, each firm will have their own risk policy as required by local regulations and best practices.
Clearing and Settlement falls under the inter-broker model meaning that payment and transfer of securities will be the responsibility of the Sponsoring Broker (or Custodian) as designated by the Originating Broker. Trades are settled in the local currency, that is to say, in the example above the broker in Kuala Lumpur will need to convert Ringgit to Singapore Dollars when purchasing Capitaland. Under the FIX set up drop copies of the trades are available and under the SunGard structure end of day reporting will be available.
Market data is distributed by the local exchange to each of the respective exchange ACE gateways in real-time. This provides for a single point of access for the data of every exchange. Order flow goes from the client to the OB then on to the exchange via the executing ACE but the market data travels in the opposite direction over the same network.
The key piece in the entire architecture is the ASEAN Common Exchange. This gateway routes orders to the respective ACE of the executing country, sends orders directly to the exchange, disseminates and receives the market data from each of the respective exchanges, holds the risk and client set up module and translates FIX messages into the proprietary protocol of the network.
The Link will expand to include a depository element offering custodian services helping to push down costs further. The depository is expected to come on line by the end of 2012 or early 2013. Then in 2013, a pan-regional clearing entity will be formed to bolster the region as one large exchange and to better manage risk. Additionally, Cambodia, Laos and Burma are likely to be folded into the mix at some point in the future.
Who Will Benefit?
There are many beneficiaries of the ASEAN link. First of all the sponsoring broker in the local market through just the connection to the ACE will be able to offer all its clients access to all the ASEAN markets that are part of the IAN (provided that broker has accounts setup with the respective sponsoring broker). Before, brokers would have had to establish point to point connections with brokers in the markets that they wished to trade in. They would have borne the cost of the network, hardware for routing orders, failover provisions and the staff needed to support it. By connecting into the link the broker will realize significant savings and offer trading in the region focusing on broking rather than providing technology.
An improved user experience for clients through the stability and lower latency within the network where before traders might have been subject to web based trading through ISPs or incongruent service level agreements (SLA) among network providers. The network managed by SunGard will offer central support, a standard level of service and experts who are managing the technology effectively.
Singapore and its exchange will stand to benefit from the trading link for a number of reasons. Firstly, Singapore has placed itself as a hub for trading between the ASEAN members and the markets it serves through its REACH program that it launched 15 August, 2011. Under REACH, SGX unveiled its latest matching engine and erected a new data center for colocation services. The other element of REACH is that in London, New York, Chicago and Tokyo the exchange setup access points so that local participants in those international markets could access SGX by simply connecting to the local access point. With its position in the ASEAN Link, member participants can access, via Singapore, international financial centers and conversely international investors can now access the ASEAN link with Singapore right in the middle. This could prove to be a critical and important development for Singapore and its brokerage community if the Link proves successful standing at the gateway of more than 500 million people.
SunGard as the key technology provider stands to gain enormously. As part of the support agreement for the ASEAN link, Sungard is to provide several Valdi Trader screens to each exchange for 18 months giving them a stronger foothold into the region. Their risk software, Selector, is housed within each exchange ACE giving them a permanent home within crucial points of the infrastructure. Additionally, the trading community within the ASEAN is small and developing. Some of these markets have only begun to offer DMA, and algorithmic trading is just concentrated in Singapore, Malaysia and Thailand. As the national wealth of ASEAN grows, pension systems evolve and electronic trading expands SunGard will have a leg in as a technology provider across the trading vertical from Valdi in the front end, Selector providing risk and Clearvision in the post trade among others.
SunGard, too, has its own global network (SGN) where it will now extend its reach to the Link. SunGard has a large data center in Singapore providing easy access to both the SGX and the Neutral Access Point. Much like SGX REACH, SunGard will be able to provide connectivity for any customer connected to the SGN into ASEAN and also ASEAN members will be able to send trades to SunGard clients anywhere in the network. They are weaving themselves in to the fabric of the South East Asia’s electronic trading industry.
FIX protocol as a standard will be given a boost with the help of the ASEAN Link. FIX is widely used in Asia largely amongst the institutional brokerage community who are offering algorithms such as VWAP, Iceberg and Implementation Shortfall to clients. Having a FIX API at the ACE will offer vendor neutrality to the Link and also kick start the local and regional firms to look more closely at solutions that employ utilizing FIX. As a global standard, firms in the Link will be able to accept order with a wider trading community outside their market.
ASEAN investors are also going to benefit with the onset of the Link with access to a broader and more diverse portfolio of stocks to invest in and at a lower cost than what they might otherwise have to pay. ASEAN as a whole will have a larger voice within the global economic community where they have lived in the shadow of China and India . Cooperation amongst the ASEAN Exchanges will increase its visibility and capability to the global investor. According to data from the World Federation of Exchanges the sum of the exchanges market capitalization from the ASEAN members would rank them ahead of BM&F Bovespa in Brazil and just behind the TMX group in Canada.
With the creation of the ASEAN link will come the STARS index. The Index while not finalized will comprise the 30 largest and most liquid companies (total 180) from each of the member countries with banking and real estate representing the two largest sectors of the benchmark. With the advent of the ASEAN Stars investors will be able to allocate assets in the regional Blue Chips and provide for an identifiable reference for fund managers and exchange traded funds (ETF).
The Link members are currently formalising an agreement with an index provider. At the time of this writing the talks were ongoing with an unnamed company to provide a range of ASEAN market data and analytics. There is currently an ASEAN 40 index provided by FTSE but the final details about the Stars Index such as whether it will be tradable or a reference index are still under negotiation.
The Challenges Ahead
With such an ambitious regional cross border initiative the viability of the Link has come under scrutiny. The Philippine Stock Exchange disclosed last November that it would postpone its plans to join the link claiming that the local brokerage industry and investing public hadn’t been as supportive of entering the arrangement as initially expected. The announcement went on to say that the PSE would join the link at a future date but felt the more technically advanced bourses should be the first to see if they can bring the project to market. The PSE upgraded their matching engine in 2010 using NYSE Technologies products. The Indonesia Stock Exchange has also pulled back on their commitment to the Link as they too wait and see how successful the initial development becomes. There is also a belief that the potential for the economy and financial industry will outstrip the rest of the ASEAN members and that connecting to the Link may not be necessary. That could very well be true. Moody’s recently upgraded Indonesia to investment grade and the economy is expected to grow by 7% this year in that nation of 240 million people despite the global economic travails.
Regulations also pose a challenge to the development of the linkage. Each country has its own rules and policies to police and preserve the integrity of their respective capital markets. There are different rules for foreign investors accessing each county, ownership rules, qualified institutions and retail investors are subject to differing guidelines. What would be ideal would be a supra-regulator to govern the bloc and this notion, some believe, is that the Link could be the catalyst for a common set of rules. Of course there are no guarantees that a regional policy would work as we see how the Europe story is unfolding.
The Back Office issues faced by the compact will need to be addressed. The post trade is the most expensive and least automated segment of the trading business in every part of the world so how is this less developed region going to cope with multi-market, multi-currency settlement instructions? How will foreign holding tax be managed or, as in Singapore, will the members have to charge GST on its trades and if so, how do they pay that bill? How will Treasury cope with the currency demands? Will the post trade be overwhelmed by the onset of algorithmic trading and each and every confirmation that has to be created? Each country will also have different settlement calendars and oversight on failed trades too. It is a daunting task and will be an eye opener to the most sophisticated back office.
The ASEAN members are expected to yield 6% growth in GDP between 2011-2015 amongst its 568 million inhabitants. The population are young, educated and will need somewhere to put their growing savings. Economic, political and regulatory union are by no means easy but this attempt to bring about a common market in this part of the world has to be commended. The worst case scenario is that the union will fail but the local exchanges will have had a taste of international interest and an improved trading infrastructure. The upside is a successful partnership that could form a key market for anyone’s portfolio. Regardless of the outcome it is a win-win for the region. Our hope is that the ASEAN Trading Link succeeds and will bring the world one step closer to an international electronic trading venue.