Published On: Thu, Apr 30th, 2009

Top 3 Challenges of Trading Asia?

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question-markThis was the question asked by Andrew Thake in the Electronic Trading Group at Linkedin. I replied “…(not in any order): 1) Settlement in different currencies 2) cultural differences and 3) finding anyone who understands most of the markets in Asia”. Later on I thought about this question more and realized that the top 3 challenges would depend on what part of the trade life cycle you are involved with. My feedback was a reflection in to my experience engaged in electronic trading here in Asia but clearly there must be something else.

Let’s take a look at the front office. You have dealers, sales traders and research sales. Dealers must find it extremely challenging to juggle all the orders the sales traders are barking at them all day. They are obliged to earn a good fill, fill the orders in a timely manner, in the correct priority and make sure they comply with the exchange and internal trading rules. “Did you fill that short sale on an uptick?” Sales Traders make their living earning commission and client relationships are a must. Challenges posed include ensuring their client gets a good fill (otherwise the client will trade somewhere else), keeping informed about the markets they are trading and thus generate trading ideas and even the post work social; key to anyone successful broker. The research sales have to make sure the research is worth selling and not commoditized and like the sales traders need to maintain and build relationships over a few drinks. Definitely off putting to your better half if he is always stuck at home with the kids.

What are the Top 3 Challenges of trading in Asia to the Operations people – Middle Office, Settlements, Compliance and Risk? The middle office is charged with trade capture and allocations. If you’ve ever worked in middle office you know how impossibly tedious and arrogant the front office can be when it comes to communicating which trades goes to what account. Also, the sheer volume of trades that are processed definitely exceeds the ability of humans to manually intervene thus their processing systems must be robust. Middle Office is generally responsible for updating the security symbols table. If the symbol isn’t in the database the trades will fall into a holding account and will have to be manually booked into the correct account. Imagine if the HSBC rights offering wasn’t setup. Are you going to stay behind to clean it up?
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The settlements people too are faced with their own specific set of challenges. They handle the last part of a trade and must follow the local securities regulatory and clearing rules where the trade has been affected. Each regulator in Asia will have different capital requirements, cut off times, disclosure rules and a whole slew of other country specific items. If a client is trading across multiple markets, among other things, trades will need to be settled in the local currency. This means multiple accounts for one client, multiple statements and in some cases multiple funding (ie Taiwan and Korea). Let’s not forget Compliance. Their mandate is to ensure that the entire trading process is done within the bounds of regulatory policy at a minimum. Ours is the most regulated industry in the world and these people must be on top of all these rules and implement any new changes that invariably occur. As you can imagine this can, from time to time, be at odds with the sales people who are primarily concerned with getting that trading fee rather than playing by the rules. Not to say they disregard the policies that govern their career after all everyone in the industry must “Act with integrity, competence, and respect “. And the risk folks have to keep the firm from going out of business from the likes of rogue traders, trading errors or even fat finger limits overlooked on a newly installed trading platform. These days that is probably the greatest challenge when trading in Asia.

Speaking of trading platforms the software vendors have their own set of key challenges too. For one, they have competition with other vendors and even from the in-house applications developed by the banks. The Gold Rush to connect Asia has all manner of trading software vendors and more are coming every day. How would you like to sell a product that claims to be multi-asset and multi market with a 99.9% up time? Does it even exist? Each asset class has its own pricing, language and post trade processing that the application must pass along. Moreover, each exchange has their own set of trading rules and market hours. Keeping up with all the changes in this dynamic industry and delivering a reliable trading application to their customer must be the greatest challenge to the software segment. Oh and if you’ve never read the agreement you sign with your vendor they’re not liable for any system related trading errors. Fancy that.

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Let’s not forget the buy-side. There challenges are equally great and varied too. They must acquire assets for one or there is no buy-side. Who has money in today’s market? Depending on the type of buy-side selecting a broker can be quite a challenge indeed. Are you too small for the tier 1 banks or too big for the local brokers? Do you want research? Or do you want unbundling and engage a Commission Sharing Agreement? How about Prime Brokerage services? Do you intend to finance your trades, trade in multiple markets, multiple assets or go short? There are many aspects to consider when selecting a broker and I haven’t even mentioned connectivity or quality algorithm offerings.

Last but not least are the Technology people. The business always has a new idea about how to capture revenue or how they would like to see a change to an existing legacy process. Technology’s Top challenges have to be resourcing those projects. They are also tasked with finding the human capital that can deliver these projects and then convincing the management that they need to spend money. We’ve all heard ” the chicken before the egg” analogy.

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There are many more Challenges when trading in Asia I’m sure. When you step back and look at the industry as a whole I would say that the Top3 challenges of trading in Asia would be 1) Communication – internally and culturally, 2) Technology – quality human capital and processes and 3) Finding someone who can navigate the morass that is etrading in Asia.

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