Published On: Sat, Jan 30th, 2010

Trading Software Vendors Needed In China

PRC FlagThis was the message from the four buy-side fund managers in the opening keynote panel at TradeTech in Shanghai January 28. The fund managers (Li Shu – Changxin Fund Management, Sha Qin – Guotai Asset Management, Liu Dayuan – Harvest Fund and Dennis Lee – Hua An Fund Management) contended that more services and functionality is needed in their trading applications. Local IT professionals prefer to work for Google or Microsoft rather than to develop cutting edge trading applications for an industry crying out for more professional investment facilities. They would all like to see foreign vendors come to China bringing both expertise and competition to the ISV industry. There is also an “urgent” need for algorithm trading as well but cited compliance, the Shanghai Stock Exchange (SSE) trading platform and bandwidth constraints as barriers to entry.

DMA was too ‘manual’ maintained one speaker explaining that they could not split orders with their current Execution Management System (EMS). The current regulatory requirement for fund managers is 1 order per account. The concept of block trading then allocating the trades after the execution is not known or at least not allowed.

Portfolio managers sit in front of the screen all day and use traders to merely assistant in the investment process. Additionally, sell side traders are not motivated to find best execution for their client but they also don’t have the tools to earn a better price for them either. Benchmarking trader performance was not a common practice with terms such as VWAP or Implementation Shortfall not widely used. Pre-trade analytics made it easier for their foreign counterparts to know which algo’s to use and when disadvantaging local traders when comparing execution performance.

The fund managers continued that they try to avoid large orders as they can’t find liquidity or perhaps that they were facilitating money laundering under the guise of ownership transfer. This is becoming increasingly harder and harder to avoid as funds grow in size in step with Chinese wealth. While it was never mentioned there certainly seems to be a place for smart order routers and crossing networks too. FIX was only touched on in the Q&A session at the end. The SSE does support a Chinese version of FIX but the fund industry doesn’t have a use for it or they don’t realize that to facilitate algo trading they will.

A note of caution however, pitching enterprise level, multi-functional solutions is not the way to go. First of all the fund managers aren’t a stage where they require this kind of sophisticated service. Secondly, there is a need for some additional features but the terminology used in the west is not likely to be recognized in the east. And, lastly, the price point for solutions is much lower, at least at this stage, than found in the mature markets. My approach would be to ask them how they are doing business and propose lean, thin-client-type solutions and build on that.

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