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PROGRAM HIGHLIGHTS
- Keynotes: Asia Emerges As 'New West' in More Interconnected Markets:
The keynote speakers from Thomson Reuters and Interactive
Data at last week's Asia Pacific Financial Information Conference delivered
a rallying cry to market participants in the region to prepare for the
challenges resulting from anticipated rises in data and trading volumes, as
the financial markets increasingly look east in the search for alpha and
healthy margins.
Opening the first day of the conference, Terry Roche, global
head of information management solutions at Thomson Reuters, outlined how
more virtual and interconnected global financial markets will quickly see
the issues that have affected the market data industry in the US and Europe
soon begin to play out in the Asia-Pacific region, and urged local attendees
to take part in steering the industry through the upcoming challenges.
Just as the credit crisis has impacted every market around
the world because these markets are more interconnected than ever before,
participants can also expect that other trends will be reflected on a global
scale, creating global requirements for technology and standardization. "The more the world's markets become electronically traded,
the more interconnected and virtual they become.... And as more markets
trade electronically and become connected, there will be more data that
firms create and markets generate, and more technology will be needed,"
Roche said. "But there are challenges around being more connected and how
the world is becoming more virtual... and all of you have the opportunity to
form where the market is going."
And as this technology is more widely deployed, algorithmic
trading will extend beyond exchange-traded equities and futures to asset
classes such as fixed income and commodities, as well as on dark pools,
which in turn creates even greater interconnectedness, Roche said.
This need extends beyond high-frequency trading environments, into
risk-related functions and for increased transparency. For example,
liquidity management and monitoring capital adequacy involves tying together
hundreds of different systems and datasets. "The days when a buy-side trader
could get by with just an order management system are gone in the West, and
I think that is coming here," he said. But new trading venues and datafeeds
often use different standards and protocols, and without definitive
standards to bring those datasets together, firms will not be able to
compete in the markets of the future, he added.
However, firms cannot create these without co-operating among
themselves and with partners. "We see an integrated world with common
standards and definitions.... There has never been a more important time
than today's turbulent markets to create a seamless, standards-based
front-to-back data delivery mechanism," Roche said. "But how do you do that
on your own? There have to be common efforts, and you are all key to shaping
how we communicate with each other."
Sargeant's Orders: Giving the keynote address on the second
day of the conference, Roger Sargeant, managing director of international
business at Interactive Data, agreed with Roche that risk and transparency
will contribute to increased demand for data globally, but he believes this
is what will create a more virtual market, as firms seek to rid themselves
of expensive technologies by outsourcing and shifting their spend to
virtualized cloud computing models.
However, he said many of the drivers behind global trends
have been less pronounced in Asia Pacific, since the region had less
exposure to the risky instruments that caused the economic crisis, while
government stimulus packages have been targeted at infrastructure projects
designed to support future growth, leading to expectations of a return to
strong growth in 2010.
In fact, on a percentage basis, growth across the Asia-Pacific region is
still greater than the rest of the world, Sargeant said. "The most
compelling change is the global shift in the economy: The center of the
world has moved east, and we are seeing more influence from emerging
markets-the Middle East, Latin America and Asia-where there is now a
tremendous accumulation of wealth. The dominance of the US and Europe is
behind us, and the influence of Asia Pacific will be huge."
For example, Sargeant said, the number of high-net-worth
individuals is expected to grow by nearly 9 percent annually until 2018,
which will not only create demand for diversified investment vehicles- such
as sharia-compliant instruments, exchange-traded funds and commodity
derivatives that reflect the region's status as a significant producer and
consumer of commodities-but also for tools to help manage that influx of
wealth. "The battle for business will be won or lost based on the tools
vendors can provide to advisors, end users and high-net-worth individuals,"
he said.
Another area Sargeant expects to take off in Asia is
high-frequency trading, which he acknowledged is still in its infancy in the
region, but has great potential as local interest grows for dark pools and
alternative venues to primary exchanges. Availability of low-latency data
and cross-border trading remain issues because of the region's fragmented
and diverse geographies and regulatory regimes, which-unlike those of the US
and Europe-were not developed with cross-border trading in mind. However, he
said Asian countries are becoming more active in driving new regulation, and
that adoption of IFRS reporting standards and the roadmap for the ASEAN
(Association of Southeast Asian Nations) exchange linkage show evidence of
increased cross-border co-operation.
Sargeant also acknowledged that in some areas, vendors too will need to
co-operate if they want to take advantage of the opportunities offered by
these growing markets. For example, the most growth is expected to come from
China and India, which are both still primarily domestic markets, so
Interactive Data has partnered with local content providers to make the
vendor's international data available to local market participants, while
being able to make local data available to Interactive Data's global
clients.
- Vendors: Flexibility Key in Maturing Asia
Data providers continue to view Asia as a major growth market, but are being
forced to take more flexible approaches when selling to markets in the
region, to respond to changes in client demand and to take account of its
unique differences and the after-effects of the economic crisis, according
to a panel of vendors, brokers and exchanges at last week's Asia Pacific
Financial Information Conference.
With vendors stepping up their focus in the region in recent years, but
still supplying disparate services, moderator Kerr Hatrick, director of
Quantitative Products One at Deutsche Bank, began the debate by asking
whether Asia is still seen as the "poor cousin" of the rest of the
world-despite the fact that it is the region least affected by the financial
crisis and is set to deliver most growth.
"It is not that we are the poor cousins, just that Asia has so many
countries with different regulations that keep us from providing a standard
service," said William Mateu, business development and sales manager for
Icap Information in Asia Pacific, adding that the broker has created a local
presence to better understand the regional market, while Marc Anthonisen,
vice president of data solutions for Asia Pacific at Standard & Poor's, said
the amount of investment required to enter the Asian market is greater than
for other regions.
Andrew Reeve, regional manager for Asia Pacific at Tullett Prebon
Information, said local presences can be the only way to co-exist in
different markets. "As a data wholesaler, we deal with many vendors in
different countries.... Sometimes you need a joint venture, and in fact,
sometimes local regulations require it," he said.
However, in the wake of the financial crisis, Asia is no longer a cash cow.
Mateu said that despite industry layoffs, firms are still trying to do the
same levels of business, and that data providers are having to approach
clients in a consultative way, and treat them as partners, whereby the
vendors create more customized solutions. "You have to be a lot more
flexible these days," he said.
Meanwhile, Anthonisen said, demand has shifted from wanting to consolidate
data sourcing from one vendor to users wanting to build plug-and-play data
architectures, enabled by new technologies, creating a more flexible
landscape where vendors can provide more targeted datasets.Similarly, end users are looking for more choice in trading venues,
including dark pools, which Kiang Dalaroy, chief information officer at SSE
Infonet, said do contribute to a more efficient market by protecting the
markets from undue price fluctuation as large block trades change hands.
However, the type of data required can differ vastly according to each
distinct market. For example, in China, 95 percent of trading is retail
order flow, which is trading on the basis of sentiment and money flows
rather than fundamental analysis, Dalaroy said.
However, clients in Asia are now seeking out more diversified asset classes,
from interest rate swaps and options to US fixed income products besides US
Treasury bonds. And clients are also becoming more sophisticated about
structuring deals with vendors, with some now demanding service-level
agreements that guarantee data quality and hold providers accountable for
any bad data, panelists said.
- Exchanges Put Asia at Center of Plans for Change
Global exchanges are looking to enter Asia-Pacific markets, either through
direct presences or via alliances with local venues, while regional
exchanges are simplifying and changing the way they provide data to market
participants that have become used to receiving data in a certain way or at
a certain cost.
On a panel at last week's Asia Pacific Financial Information Conference,
Rafah Hanna, head of MTS Data at bond trading platform EuroMTS, said the
company's aim is to set up 15 new markets over the next five years in growth
markets across Asia, the Middle East and South America, including Brazil,
Egypt, Saudi Arabia and Japan. Likewise, Jeannie Merritt, associate vice
president at Nasdaq OMX, says although the exchange group does not have a
datacenter in the Asia- Pacific region, it is planning to do so, along with
other initiatives to bring its data and technology to local markets and
traders.
Meanwhile, local exchanges are updating to cope with increased requirements.
For example, by the end of this year, the Shanghai Stock Exchange will roll
out a new trading system to handle higher volumes, which can process 20,000
transactions per second and support 10,000 listed instruments, said Kiang
Dalaroy, chief information officer at SSE Infonet. Meanwhile, Hong Kong
Exchanges and Clearing is also revamping its market data system to increase
its throughput capabilities, according to Daniel Poon, vice president of
sales and marketing at HKEx. The exchange is also looking to simplify its
data license policies to promote its derivatives market, Poon said.
The other exchange panelists are also trying to simplify policies,
especially around the contentious issue of exchange netting for MISU
(Multiple Instance, Single User) billing-where an exchange will recognize
that a single trader viewing the same data from a single exchange via two
vendor devices need only pay once.
Merritt said Nasdaq is constantly reviewing its unit of count, but does not
perform direct billing, making it hard to implement MISU, although it is
starting to introduce flat fees for some newer data products, while MTS only
nets for clients with enterprise licenses, instead charging "a flat fee that
is very simple, no matter how many users or where you are," Hanna said.
However, as the line between exchanges and vendors continues to blur, and
Asia faces the potential of new trading venues, exchanges must change the
way they do business. "Clients are driving this, and they don't want
unlimited choice, they want excellence in the choices available. Exchanges
have traditionally been cash cows, but are now having to compete for market
share," Hanna said.
HKEx appears to already be taking this to heart: Instead of looking at other
exchanges as competitors, Poon said the exchange views other exchanges as
potential partners to promote its own data business.
- Asia Braces Itself for Algorithmic Data Explosion
Panelists at last week's conference urged attendees to prepare for increases
in speed and volume expected to result from growing use of algorithmic
trading strategies already commonplace in the US and Europe. Although
high-frequency trading levels are much lower in Asia Pacific than other
regions, panelists anticipate this will increase rapidly as growth in Asia
outstrips other economies, prompting an influx of trading activity.
"Although since the credit crisis trading volumes have not gone up that
much, there has been an explosion of quote data, which we have to capture,
get to the right applications and store historically... which we will use
for market replay purposes," said Dennis Mwansa, head of trading
infrastructure services for Asia Pacific at Royal Bank of Scotland in Japan.
"So we have to consider our storage costs and look differently at capacity
planning so market events do not crash our systems."
Katherine Shen, director of worldwide industry solution development at IBM,
said although high-frequency trading only accounts for between five and 10
percent of trading in Asia, it is growing, and user firms must prepare for
rapid changes and associated rises in data volumes.
Driving this trend is Asia's economic prospects, but also the potential for
new trading venues in the region to compete with traditional exchanges. "My
view is that... we will see the emergence of lots of new venues, with the
introduction of new technologies and lots of new data," said David
Wilkinson, senior director of business development for Asia Pacific at
Equinix, adding that with that will come demand for more intelligent data
filtering technologies and a focus on low latency across the region.
Keeping it Real
However, Kerr Hatrick, director of Quantitative Products One at Deutsche
Bank, warned that firms must stay grounded in reality and not over-provision
for demand that simply doesn't exist. "We are told by vendors that we need
microsecond-even nanosecond-latency, but I would say that in Asia, we don't.
So we have to be skeptical about vendors that want to sell us expensive
systems. And before you think about an advanced trading strategy, you need
to back-test it against tick data or order book data, and tune it for the
opportunities specific to your market. In the US there are thousands of
trades per second, but in Hong Kong there may be one trade per second-and
that's in liquid stocks," Hatrick said.
However, in some cases, advanced strategies are taking off in other asset
classes. "It's true that equities high-frequency trading is not that great
in Asia, but foreign exchange trading is using high-frequency trading, and
while human traders do a lot of that, probably 90 percent of hedging is done
using automated strategies," Mwansa said. "For us, technology is an enabler
of efficiencies... so I see growth of high-performance computing in
contracts that are very standardized, such as FX and futures."
However, Hatrick sees high-performance computing used mostly in other areas,
such as around pricing and valuing complex assets, or for incorporating new
inputs such as news and sentiment into trading strategies. But he warned
that in the search for smart new ways of trading, firms must not lose sight
of factors such as transaction costs. "We were involved in a project to look
at news sentiment as part of a high-frequency intra-day trading strategy,
but when we included trading costs, it didn't work," he said. "Transaction
costs must be a key part of any strategy... but transaction cost models [in
Asia] are still in their infancy."
- Investors De-Risk as Reliable Credit Data Proves Challenging
The global credit markets are the most challenging asset classes for
sourcing reliable data, compared to other over-the-counter asset classes, as
a dearth of liquidity continues and money managers-perhaps as a result-seek
out simpler and less risky investments, according to a panel and audience at
last week's conference.
Respondents to audience polls during the panel felt credit was the hardest
asset class to obtain reliable data for, followed by equity derivatives and
commodities, and that firms need a mix of local and global vendors, brokers
and in-house teams to source the range of data types required to support
trading in hot asset classes.
"The problem is that credit isn't hot at the moment," said Elliott Hann,
head of data sales for Asia Pacific at GFI. "Most people are actually now in
the iTraxx indexes. There isn't much activity in single names. So we have an
asset class where people have lots of positions, but which are hard to mark
to market, and are suffering from a lack of liquidity."
Rory Manchee, managing director of Asia Pacific at Standard & Poor's, said
moves by regulators to implement central clearing for over-the-counter
derivatives such as credit default swaps are aimed at unlocking the credit
markets by making data more transparent, but that in the meantime, the
absence of de facto standards around valuation models, transparency around
data inputs and methodologies is key. "In some cases, the recipe-i.e., the
quality of inputs-is more important than the output," Manchee said.
At the same time, an audience poll showed that investors are now moving more
into cash equities, reflecting investors' desire to de-risk, said Madhu
Gayer, head of investment risk and analytical services for client asset
servicing at Northern Trust, while Hann speculated that clients are going
"back to basics" with asset classes they understand, and price and
volatility data driven by real transactions rather than models and
assumptions.
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