Asia Etrading 2011 Year in Review

2011 in Asia’s electronic trading industry saw much transformation, traction and, sadly, tragedy in a year where the region was largely insulated from the Global Financial Crisis (GFC) hangover. The earthquake and tsunami that wreaked havoc in Japan, the failed merger between Australia and Singapore, Hong Kong’s on-going exchange platform build-out, the announcement of competition in Korea, India and smart order routing, flood ravaged Thailand and the year culminating in the collapse of MF Global only hints at some of the events that occurred in the most dynamic region of the world. With more than ¾ of the world’s population spread over 1/3 of the globe we only have 3500 words to endeavor to recount the Asia year in review.

January
January saw the launch of the Lao Securities Exchange (LSX) with 2 Stocks – Banque pour le Commerce Exterieur Lao (BCEL) and EDL Generation. The exchange uses the single price auction method matching trades at 10:00am and 11:30am. The LSX is a joint venture between the Lao government and Korea Securities Exchange which entered into an MoU September of 2007. There were investments made in exchange surveillance systems at both the Korea Exchange (KRX) and the Philippine Stock Exchange (PSE) The Singapore Exchange (SGX) introduced pre-trade risk controls. Alternative trading venues saw the demise of AXE ECN, a joint venture between the New Zealand Exchange (NZX) and six investment banks. Chi-east, the Chi-X and SGX non-display joint venture, went live in Hong Kong, Japan and Singapore with 5 initial participants. The China Securities Regulatory Commission (CSRC) issued a draft for Qualified Foreign Institutional Investors (QFII) regarding trading the CSI300 index future. QFIIs are restricted to hedging and by notional amounts traded. The CSRC also approved the joint ventures of JP Morgan Chase & Co and Morgan Stanley with First Capital Securities and Huaxin Securities, respectively. Australia’s regulator, the Australian Securities and Investment Commission (ASIC), improved short selling reporting by forbidding netting of long and short positions by fund managers across multiple accounts. Lastly, the Securities and Exchange Board of India (SEBI) allowed India’s exchanges to offer trading in derivatives contracts on 24 global exchanges.

February
The most notable event this month was the maximum fine handed to Deutsche Bank Korea (DBK) of KRW 1 billion (~USD900,000) from the Korea Exchange’s Market Oversight Commission. The trade in question was executed November 11, 2010 ten minutes before the exchange closed on option expiration day. Initially, DBK wrote calls and bought puts underlying the KOSPI200. Then, in the last 10 minutes of trading 199 names of the underlying KOSPI index were sold across 7 trades valued at USD2.2 billion. These large orders then sent the index lower from 254.62 to 247.51 down 7.11 points or 2.79% decreasing the short call premium and increasing the long put premium realizing a gain of around US40 million. As a result, Deutsche Securities Korea was banned from the KRX for a period of 6 months. Deutsche Bank’s Hong Kong and New York branches were also implicated. More from the derivatives space this month witnessed the Bombay Stock Exchange (now BSE Ltd) begin trading single stock futures and options contracts that would deliver the underlying rather than settle in cash. In Japan, the Osaka Securities Exchange (OSE) launched J-Gate, its derivatives trading system built on NASDAQ OMX technology declaring “the world’s highest order processing capacity”. On the topic of speed, the OSE’s rival, the Tokyo Stock Exchange (TSE), launched its low latency market data service. The exchange also reduced tick sizes in its equity options in an attempt to boost liquidity and entice high frequency traders. Bursa Malaysia’s new CEO Dato’ Tajuddin Atan was appointed and the ASEAN Trading Link of which Malaysia is a member completed their technology design study. The Hong Kong Exchange began construction on its Tsuen Kwan O-based data center. The mainland’s regulator the CSRC allowed qualified futures firms to run consulting businesses on futures investment and SEBI, India’s regulator, launched its data warehousing and business intelligence system.

March
At 14:46 local time on Friday, 11 March, 2011 Japan experienced its largest ever recorded earthquake off its north-east coast. The 9.0 magnitude quake generated tsunami waves reaching heights of 40 meters and is believed to have shifted the Earth on its axis by some 10 to 25 cm. The following Monday morning, however, Japan’s exchanges were not deterred and opened for business seeing trading volumes double and volatility soar amongst panic selling. What had averted an even greater panic was that all of Japan’s bourses were able to handle the surge in trading and perform without any technical problems. The President and CEO, Atsushi Saito, came under fire from many western firms for not having closed the exchange as foreign companies were evacuating their staff to Hong Kong, Singapore or Australia under the threat of nuclear radiation. Other news in Asia came out of Thailand where it was busy launching single stock and silver futures. The exchange was also actively engaging securities companies and institutional investors to adopt algorithmic trading. China continued to expand its commodity futures market by approving the listing of both lead and coke futures. The CSRC was not the only Asia regulator with some news this month. ASIC finally announced a clear timeframe for when competition could commence in Australia and they also presented a consultation on the Market Integrity Rules (MIR) for Chi-X. Western exchange groups were busy in Asia as well with Eurex’s KOSPI option surpassing the 500,000 contract mark in only 7 months. NYSE Euronext and the Tokyo Stock Exchange began exploring connectivity to the former’s SFTI network and the International Securities Exchange announced an agreement with the BSE Ltd to launch derivatives products.

April
This month saw the end of the proposed $8 billion buy-out of the Australian Securities Exchange (ASX) by the Singapore Exchange (SGX). Australia’s Federal Treasurer, Wayne Swan, rejected the proposed merger whose office can block deals involving foreign ownership. Calling it a “no-brainer”, Mr. Swan was concerned with Australia’s financial industry suffering at the hands of a regional competitor. The takeover bid did face other hurdles such as removing the 15 percent ownership cap on the ASX requiring legislative approval. There was also the Singapore government’s 23% non-voting stake in SGX that would have placed Australia’s national exchange in the hands of a foreign government. Some say this was a lost opportunity for Australia as it would have afforded access to Asia and make the country a regional financial center. Despite this setback for the SGX the bourse opened its colocation data centre with more than 50 market participants as part of its “Reach” program. Thailand also announced that it is upgrading its matching engine technology in both the equity and derivative segments to cater to algorithmic and latency sensitive trading. In Hong Kong, the Mercantile Exchange finally obtained the go ahead to commence operations after more than 3 years of delays. Also, the Multi Commodity Exchange of India (MCX) filed a Draft Red Herring Prospectus with SEBI so that the bourse may meet the ownership requirements to apply for an equities trading license. Other regulators in Asia were also busy in April last year. The Taiwan Financial Supervisory Commission (TFSC) became a signatory to IOSCO and Masamichi Kono of the Japan Financial Services Authority (FSA) will lead the International Organization of Securities Commissions Technical committee. The Japan FSA also extended restrictions on short selling. The Monetary Authority of Singapore (MAS) brought in a new Managing Director, Ravi Menon, and made some changes to its Board of Directors.

May
May saw the execution of the first trade by ICBC at the Hong Kong Mercantile Exchange (HKMEx) of its 1kg physically delivered gold contract. The exchange has ambitions of being the primary commodity exchange in Asia leveraging its time zone and access to China. Additionally, it is using LCH Clearnet (in London) for its clearing rather than the Hong Kong Exchange’s clearing apparatus pioneering (along with Chi-east) competitive clearing in Asia. The HKEx too had some interesting developments in May as it continues to ramp up its derivatives business by introducing synthetic futures trading in its stock options market. A newly created role at the exchange, Chief Administrative Officer, saw Joseph Meyer the ex-CEO of Chi-X Japan appointed. On the topic of Chi-X, the Australian subsidiary finally had its Market License approved. Singapore was also busy in May. The Singapore Mercantile Exchange (SMX) lost their CEO Thomas McMahon who served less than one year amid differences of opinion on the direction the exchange should go. SGX, the cross town rival, saw rubber futures added to its derivatives segment. This product was a hangover from the now defunct Singapore Commodity Exchange (SICOM). Also, the SGX announced the reduction of tick sizes in order to cut trading costs for the industry and try to fuel high frequency trading at its exchange. Once again, Eurex was active in Asia last May. The BSE’s flagship index the SENSEX 30 began trading on the German bourse, the KOSPI option surpassed another milestone of 1 million contracts doubling volume in only two months and, finally, Eurex launched its access point in Hong Kong. Not to be out done, NYSE Technologies expanded connectivity into China with Shanghai Stock Communications (STOCOM), a wholly owned subsidiary of the Shanghai Stock Exchange, establishing a connection to the NYSE Technologies Marketplace for FIX order routing services.

June
Exchange competition in Australia continued to take form this month when the ASX gave the nod to Chi-X to use the exchange’s clearing and settlement infrastructure known as the Trade Acceptance Service (TAS). TAS went live October 2010 in anticipation of competition under which Chi-X entered into a 5 year agreement agreeing to pay A$275,000 (USD280,000) per annum to use the service. TAS allows trades in CHESS-eligible ASX-listed or quoted securities executed by any Approved Market Operator to be cleared and settled by ASX Clear and ASX Settlement. Japan’s competitive landscape continued to evolve too with SBI Japannext accepting order flow from that country’s largest retail broker, SBI Securities. Also, Goldman Sachs upped its stake in the TSE to 2.64% making it the second largest shareholder behind Morgan Stanley with 4.4%. In India, SEBI allowed the National Stock Exchange (NSE) to list S&P 500 and Dow Jones futures. The regulator also allowed for a liquidity enhancement scheme effectively permitting rebating to market makers in the equity derivatives segment. Integration of the FIX Protocol into Taiwan’s exchanges and clearing facilities was completed. Silver futures trading began on the Thailand Futures Exchange and the country’s top regulator SEC Board Chairman Vijit Supinit resigned. The Singapore Exchange continues to improve the quality of its secondary market by opening a consultation on its pre-open and pre-close phases. The crux of the proposal is that during the pre-open phase the exchange would publish a real-time Indicative Equilibrium Price (IEP) and the pre-close phase will close at a random time. An interesting equity trade happened between Crédit Agricole and CITIC Securities. The former is selling 19.9% of both CLSA and Crédit Agricole Cheuvreux to the latter. What’s interesting is that CITIC also has a joint venture in China with Newedge a competitor of CLSA.

July
You would have thought that the first full month of summer would have been quiet but it was far from it. The most interesting news came out of Korea’s Financial Services Commission (FSC) with its announcement to overhaul the country’s financial system. The proposal is far reaching tabling changes to develop Korea’s investment banks, improve the fund management industry for its aging population, reform market structure allowing for exchange and clearing competition, improve capital raising channels for businesses and build on its regulatory policies to prevent regulatory arbitrage and punish those engaged in price manipulation. The reforms are long overdue as Korea’s government has, over the years, put its exporting industry ahead of its capital markets. Further regulatory news in Asia saw Mr. Ashley Alder replace Martin Wheatley as the Head of Hong Kong’s securities regulator and Ms Jane Diplock, the ex-Chairperson of IOSCO Executive Committee joined the Singapore Exchange board. The usually staid post trade space saw the Korea Exchange improve its settlement efficiency by moving delivery and payment for settlement securities to T+2. Hong Kong ,also, brought a T+2 finality to its trade settlement apparatus by having cash and securities delivered on the same day into CCASS, the Central Clearing and Settlement System for the Hong Kong securities market (DCASS is derivatives). The derivatives space was the most active asset class in Asia this month. The CFTC allowed Bursa Malaysia’s futures contracts to begin trading in the US, the Stock Exchange of Thailand implemented new floors and ceilings for warrants, rice futures began trading on the Tokyo Grain Exchange, India’s ACE Commodity Exchange launched guar seed and guar gum futures, the HKMEx launched silver futures, the OSE revised trading hours and signed a strategic partnership with the CME. The CME also, appointed Julien Le Noble as its Head for Asia.

August
The United States credit rating was downgraded this month and caused volatility to jump right across Asia but it was news from China that dominated August. The CSRC granted QFII quota to BlackRock and Amundi bring the total to 9 firms this year permitted to trade the mainland’s capital markets. The Chinese regulator also upgraded its pilot program for margin trading and short selling opening it up to all domestic brokers. The Renminbi (RMB), China’s currency, took another step toward convertibility. China’s Ministry of Commerce said it will allow foreign investors to make direct investments in China’s securities markets with RMB obtained from overseas. This move strengthens Hong Kong as a center for offshore RMB trading and is intended to increase the circulation of the currency in and out of the country. Initially, the eligible amount was set at 20 Billion Yuan (USD3.2 Billion). There was also an announcement from the Board of Directors of HKEx that an agreement in principle had been entered into with the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) with the objective to establish a joint venture in Hong Kong. The possible cooperation could include the expansion of index and other equity derivative products and the development of new indexes. HSBC China became the first foreign bank to join the Shanghai Futures Exchange (SHFE) and ANZ was given the nod to trade China gold futures. In other news, the Singapore exchange eliminated the lunch break in the middle of its trading day and their much anticipated matching engine, dubbed “the world’s fastest” under its Reach initiative, went live. Elmer Funke Kupper replaced Robert Elstone as the CEO at the ASX, Sompol Kiatphaibool was re-elected Chairman of the Thai Exchange. HSBC was in the news again. This time in Hong Kong where it pulled the plug on the launch of its retail dark pool StockMax. Pressure from the government, the local brokerage community and the regulator caused the move. In fact, the HK SFC added a condition to HSBC’s automated trading services license that only allowed for professional investors. Best execution takes a back seat to special interest.

September
The end of the summer brought with it further market structure improvements and enhancements in Singapore. First was a consultation paper on derivatives clearing reform. The exchange is seeking opinion on how to limit clearing member’s default liabilities, Clearing Fund use and how they should deal with multiple defaults. The next improvement was with respect to transparency where trading halts could be announced earlier at 8:30 am instead of 9am, more disclosure on product listings and trading suspensions with earlier disclosure of corporate actions. The Stock Exchange of Thailand (SET) was in the news again with an announcement to launch oil futures in their derivatives segment and improve Settrade its online trading platform. According to the exchange, online trading accounted for 24.5 percent of securities volume and 32.5 percent of derivatives volume. In India, SEBI gave approval to the BSE to launch a small and medium enterprise exchange (SME) providing a much needed source of capital to the sub-continent’s startups. The BSE also began its liquidity enhancement program as it struggles to gain market share from the dominate NSE. Under the program members are paid for trading and maintaining open interest in the flagship SENSEX30 index. Further international relationships were fostered in September too. Brazil’s BM&F Bovespa and the Shenzhen Stock Exchange signed a MoU and the Eurex KOSPI celebrated its one year anniversary with yet another volume milestone. The NYSE and TSE continue to strengthen bonds, this time with NYSE Liffe’s JGB (Japan Government bond) futures contract. This contract was previously cash settled every day in London but from September 26 the positions became transferable to the Tokyo Stock Exchange making them fully fungible and boosting the Open Interest at the Japanese bourse. After much effort, Bursa Malaysia total derivatives trading hit a 31 year high.

October
October was all about competition in Australia with the launch of Chi-X Down Under. However, this was overshadowed by the MF Global bankruptcy and because that announcement fell on the last day of this month look for the highlights in November. The much anticipated, highly political and most exciting thing to come to Australia’s financial industry in a long time was Chi-X Australia’s first trade on October 26. It took more than three years and an overhaul of Australia’s regulatory regime to come about but in the end that market’s structure will never be the same. Competition spurred self examination on the part of the ASX and a complete overhaul where it improved technology, services, lowered fees and enhanced the efficiency of their equity market. It also drove a wave of investment from vendors and brokerages seeking to route orders smartly under the Market Integrity Rules. Chi-X is using the ASX’s CHESS clearing apparatus which the exchange still holds its monopoly on but that could change if LCH Clearnet enters that market. A few days before the launch of their rival, however, the ASX had an outage befall them much to their dismay. The Korea FSC expanded on its capital markets overhaul with details on hedge fund regulation, capital requirements, risk calculations, prime brokerage and funding. India saw the BSE and NSE initiate the cross connect of members to each other’s colocation facilities giving a boost to high frequency trading and best execution. Asia’s derivatives industry continued to grow with new contract listings and new global cooperation. The BRICS announced an exchange alliance that will see each other’s index derivatives listed amongst the associated exchanges. The CFTC issued a no-action letter to the Taiwan Futures Exchange (TAIFEX), TOCOM amended give-ups, the SGX cleared its first Asian FX forward, the Zhengzhou Commodity Exchange (ZCE) launched methanol futures and the MCX commenced trading in cotton futures.

November
MF Global dominated news all around the world and here in Asia too. While the impact in this region was not on the scale of London or New York the bankruptcy had a profound affect on many clients, staff, vendors and the industry as a whole. It was believed that a buyer for the Asia businesses was all but a done deal but uncertainty about client assets and the complexity of multi-jurisdictional regulations on client money appears to make sales by country more likely. Next was the TSE’s and OSE’s announced merger which isn’t expected to complete by 2013 if the Japanese regulator and OSE’s shareholders approve it. The terms of the deal see OSE shareholders receiving less than they would have liked and could prove to be the undoing of the deal. While this merger is good for Japan’s industry and forces that country’s many regulators to desilo and compel Japan to be competitive again each exchange has spent millions of dollars on different technology and will likely see a large spend in bringing everything on one platform. Speaking of which, the TSE launched Tdex+ the new LIFFE CONNECT low latency platform for futures this month delivering 5 millisecond order response times. Options had been trading on the matching engine since 2009 and this upgrade brought futures into the fold. In keeping with Asia’s all around exchange technology enhancements the Shenzhen Stock Exchange announced its 5th version matching engine. Expected to be delivered in 2015 the platform will handle 200,000 orders per second. Exchange competition continues to heat up in Australia with the primary, ASX, launching PureMatch. PureMatch is the exchanges answer for high frequency trading (HFT) clients and, like incumbent Chi-X, introduced a maker taker pricing scheme for trading in this venue. Chi-X Australia in less than one month managed to capture 2% of market share in the SPI200 names. In OTC, Citi cleared its first Asian trades on LCH.Swapclear and the Korea FSC lifted its ban on short selling.

December
The final month of the year included a much needed improvement to Hong Kong’s secondary market with an upgrade of its Automatic Order Matching and Execution System (AMS) to version 3.8 on December 5th. The matching engine scales to 150,000 orders per second and proffers average latency of around 2 milliseconds. The upgrade brought with it much needed market data improvements with 10 price levels broadcast every 1 second. Not the most impressive for the world’s largest bourse by market capitalization (its own share price on the exchange) but the HKEx has made the primary market a priority as a facilitator of fund raising in the last few years. This is changing though with key hires throughout 2011 and its new Tsuen Kwan O data center (the details of its new Tier 4 colocation facility were announced this month too). In Australia, the Trade Acceptance Service at the ASX rejected trades sent from Chi-X, the first such issue amongst the competitors in only five weeks since the latter was launched. And a final note for December was the connectivity agreement between the Tokyo Stock Exchange and NYSE Euronext. Under the agreement, TSE Arrownet and NYSE SFTI networks will be brought together to launch new services to include access to each other’s matching engines and the dissemination of market data.

Our brief examination of the year in review highlights the scope of transformation underway in Asia and the scope of interconnectedness of our 21st century electronic trading world. While these changes are far reaching, APAC has had the benefit of observing the West to employing best practices and foster its development effectively. The region will continue to enjoy capital inflows as global investors seek higher returns and diversification in less mature market. Local investors too are becoming more sophisticated and demanding higher services further fueling the growth and depth of this region’s electronic trading industry. Traction into 2012 will no doubt continue to transform Asia and build on the progress of the past year but hopefully without the tragedy.