Different regulation, different result
One of the key drivers for the industry’s expansion in other markets has been regulatory change. The introduction of Reg NMS in the US in 2005, together with MiFID in Europe two years later, paved the way for the entry of new trading venues across dozens of countries. These regulations were brought about to provide a framework for unbundling and “best execution”, which has helped the alternative venues flourish. The story in Asia, however, remains vastly different.
The lack of a single-market structure across multiple jurisdictions, which provides the platform to launch regulatory initiatives, is clearly lacking in Asia and has delayed the industry’s development.
Australia was the first country in the region to address the issue of potential new market entrants. ASIC, the local regulator, and the Australian government have been considering separate applications for an Australian Market License (AML) from three applicants: Liquidnet, Chi-X, and AXE-ECN, a consortium partly owned by the New Zealand Stock Exchange Ltd and various brokers. Other regulators around the region have, no doubt, been watching and waiting for the result. No AMLs have yet been awarded, but the MTFs remain confident that – despite the delays – a positive outcome is likely. Such a result may also pave the way for other countries in the region to open their markets to competition. Such an outcome would benefit all investors.
The right solution for investors in Asia
It is important to remember that most alternate trading venues seeking to expand in Asia are essentially offering a solution to structural problems, which continue to disadvantage the region’s trading community: a lack of liquidity, information leakage and wide trading spreads. Change and innovation in the trading of equities will continue to spread across Asia, albeit at aslower pace perhaps than other regions.
There are also challenges for the buyside trader, who has an increasing number of executions venues – and trading tools – to choose from. Ultimately, continued advances in technology and improvement of these tools should make their job easier. We also believe increased choice should help bring the trader up the investment value curve. That said, the buy-side trader is more empowered than ever before. With the introduction of DMA, algorithms and latterly alternative venues, the buy-side trader has taken back control of the execution process, rather than just outsource these incredibly important decisions to preferred brokers.
Today’s buy-side trader can choose where and how trades are executed, often bypassing the sales trader. As this evolves, the decisions made by the buy-side trader become more valuable, tangible and all the more transparent. The capabilities of institutions will undoubtedly grow as the technology accelerates and the knowledge base expands.
It is commonly understood that the firm that generates the most alpha is also the same firm with the best ideas which can be implemented the quickest. With this in mind, traders will need to use all available weapons in their armory to seek liquidity and secure the best possible execution for the portfolio manager.
Today, there are certainly more choices available for traders in Europe and the US, as compared to those in Asia-Pacific. Also, the challenges of regulation, fragmented geographies, trader adoption, change in trading styles and critical mass remain very apparent. Despite the many hurdles, we remain very confident that the industry will rise to the challenges across the region and deliver innovation, further empowering the buy-side.
Empowering the Buy-Side – Will alternative venues re-shape trading?
