As the top tier of exchanges worldwide vie with alternative trading venues and pursue strategies of acquisition, partnerships and technology sales to become truly global businesses, the Asia-Pacific region is shaping up to be a key battleground in 2010.
But as well as following Western markets in embracing high-frequency and algorithmic trading and focusing on latency reduction, incumbent exchanges in Asia-Pacific are forging their own path and finding ways to innovate in their own markets and attract more liquidity.
The next generation
The Tokyo Stock Exchange (TSE) began 2010 with the January 4 introduction of a next-generation trading system called 'arrowhead' for its cash-equities market. It was designed in partnership with Fujitsu to offer ultra-low latency and high-throughput access to move close to parity with the top US and European exchanges and satisfy the increasing demands of sophisticated trading institutions and high-frequency traders in Japan.
However, Peter Tierney, senior vice-president at NYSE Technologies, says Tokyo is not alone and that nearly all the exchanges in the region are moving in a similar direction.
"If you look at their architecture plans and strategies, they are all about bringing on capacity to support higher volumes driven by algorithmic trading, reducing the minimum tick size, making markets more accessible and where possible adopting standards - FIX, multicast for market data, etc," he says.
"Then, on the business side, they're looking at the role of market making and introducing that where it might not have traditionally been a feature of the market. They're looking at direct market access (DMA) and the role of brokers - maintaining that while catering for the firms that deliver significant volume," says Mr Tierney.
"The exchanges' plans are fairly visible on these trends. But what's less clear is how real the competitive threat is," he adds.
Some markets in the region have already faced a low level of competition from emerging alternative trading venues. But Nomura-backed Instinet's subsidiary Chi-X Global is putting the most fear into established exchanges after its approach has been proven to win market share in Europe.
Chi-X Global has established a 50-50 joint venture with the Singapore Exchange (SGX) to create Chi-East, a non-displayed platform that aims to initially offer block-crossing facilities for equities listed on SGX, and on an offshore basis for the Australia, Hong Kong and Japan exchanges by mid-2010.
Chi-X Global also announced plans to form Chi-X Australia in February 2008 - although it, along with other would-be entrants, is still awaiting regulatory approval there. Similarly, Chi-X Japan began the process necessary to file a proprietary trading system (PTS) application with the Japan Financial Services Agency in November in anticipation of launching a displayed, alternative equities marketplace by summer 2010, subject to its approval. PTS is the Japanese label for what is roughly equivalent to a multilateral trading facility in Europe or an alternative trading system in the US.
All in good time
In the US and Europe, regulatory-driven fragmentation and the most recent wave of alternative execution venue launches occurred at the same time as a technology arms race was developing to increase the speed and capacity handling of core exchange infrastructures.
But Mr Tierney says he believes the incumbent exchanges in Asia-Pacific are not feeling rushed to address both these challenges right away.
"In Asia-Pacific it feels a bit more like slow-motion. The exchanges have the opportunity to address their pricing models and reduce minimum tick sizes, to look at capacity and to tune their models," he says. "I don't think they feel at all the same immediate competitive pressure models in the US and Europe felt."
TSE's arrowhead launch has been seen as less of a direct response to potential competition, and more a catch-up project to bring its speed and matching performance up to par with the best exchanges in the world. It, for now, has achieved the title of fastest exchange in Asia - something that market participants feel is appropriate for its role as the largest by market value.
Yuichiro Yamamoto, manager of the department of IT development at TSE, says the project also focused heavily on delivering benefits to the exchange's customers from improved market rules. "Most of the effort on arrowhead from when we started in 2006 went on the design phase," he says.
"We have delivered the five-millisecond execution speed, improved from seconds before. And so far the performance has been good. We will monitor feedback from the high frequency traders over the next six months, and track market trends and respond," he adds.
Competitive offering
Many industry commentators predict that the speed of arrowhead, combined with more competitive PTSs in the market, will attract more high-frequency trade volume into Japan from outside investors. And there will be fragmentation as these alternative markets are supported with liquidity-seeking arbitrage opportunities.
"It might go like the US and Europe," says Mr Tierney. "But on the other hand, having a well-run, efficient, cost-effective central market is still very attractive to traders. The cost of fragmentation is very obvious in some of the more mature markets. If exchanges have done enough early enough, they may actually take some of the wind out of the sails of the business case of these alternative markets. TSE will be the real test case."
By mid-January, Credit Suisse says a review of trading on arrowhead so far had already narrowed the spread between the bid and ask of a trade 25% for Nikkei 225 average constituents, due to the introduction of smaller tick sizes.
But beyond improvements in its own market, there is still a question about whether TSE sees a bigger role for itself as a global exchange company and whether it will embrace similar strategies to those being pursued by Nasdaq OMX, NYSE Euronext, London Stock Exchange, Deutsche Bourse and Chicago Mercantile Exchange.
Rik Turner, senior analyst at Ovum, says these 'top-table' exchanges have strategies characterised by buying or taking equity stakes in partner exchanges around the world, and developing or acquiring technology that can be run internally but also sold to partner exchanges and market participants.
"With the performance of the arrowhead matching engine ostensibly on par with those being sold internationally by the top-table exchanges, it - together with Fujitsu - could possibly engage in this part of the strategy," he says. "But it is clear they haven't set up a separate technology division so far."
TSE would not be drawn on whether it or Fujitsu had retained the intellectual property rights to arrowhead, or whether it might be interested in expanding beyond its own market.
For its part, Chi-X, although not a traditional exchange, appears to be taking a similar strategy - getting an early toe-hold in attractive markets and also developing its own technology arm, Chi-Tech.
Continued investment
Even if not directly facing a competitive threat or aspiring to global status, across the Asia-Pacific region traditional exchanges are continuing to invest in their matching engines, customer gateways and other services to better serve domestic investors and attract foreign liquidity. And most often, they are partnering with one of the top-table exchanges for technology provision and consulting.
For example, the Philippines Stock Exchange (PSE) was due at the end of January to launch a new trading system based on the Nouveau Système de Cotation (NSC) matching engine from NYSE Technologies. It is also using two components of the NYSE Technologies Universal Trading Platform (UTP), which is the platform that all NYSE Euronext cash and derivatives exchanges are being migrated to.
"For facing the market [the PSE] got a FIX gateway, the common customer gateway, and for publishing market data out to their participants and vendors they're using our XDP exchange data publishing platform," says Mr Tierney. These are the pieces that sit in front of the UTP market in the US, Paris and so on. So they are already getting the benefit of the UTP platform even though the core engine is NSC.
Jeff Olsson, ASX's group executive for technology
Time to upgrade
In Australia, the government will not consider granting any new licenses to rival exchange operators until after changes to real-time trading supervision have been moved away from the Australian Securities Exchange (ASX) to the Australian Securities and Investments Commission in the third quarter of 2010. As a result, the ASX has had plenty of time to upgrade its infrastructure and develop new products to deliver to the market.
In 2006, the Australian Stock Exchange was among the first wave of exchanges to go live with an integrated trading system, incorporating equities and derivatives. The software was delivered to ASX by the Swedish company OMX (now NASDAQ OMX).
Jeff Olsson, ASX's group executive for technology, says the ITS upgrade last year increased ASX's capacity significantly and reduced latency to a fraction of the previous level. "There'll be further improvements in 2010. It is difficult to speculate on comparisons with new competitors' performance because, currently, none are licensed."
The ASX has also created two new trade execution service offerings to specifically counter services that competitors may seek to introduce. CentrePoint will see anonymous trades executed at the midpoint of the best bid-offer to help facilitate liquidity search for less liquid stocks. VolumeMatch is a variation on the dark pool theme for large orders that will offer fund managers the benefits of protecting both their identity and order-size from others in the market, but with post-trade price transparency. Both are currently awaiting regulatory approval.
Relationship building
Singapore too has upgraded its OMX-based system in recent years and talks are under way on upgrading to the provider's new Genium platform. The relationship between SGX and Nasdaq OMX is likely to remain strong after former OMX president Magnus Bocker became SGX's new CEO at the end of last year.
Bursa Malaysia is another exchange that has a close relationship with NYSE Euronext, going back to the predecessor Atos Euronext Market Solutions joint venture, which kicked off the exchange's most recent market infrastructure upgrade. There has been some speculation that NYSE Euronext may be primed to acquire a stake in the Malaysian exchange, particularly after Bursa Malaysia sold a stake in its derivates unit to Chicago Mercantile Exchange last year. But Mr Tierney says an ownership move is not likely in the short term, although it could not be ruled out in future.
The exchange has recently completed a project to integrate its core trading infrastructure for the cash equities and derivatives market onto the NSC platform. But of more interest was its move to implement some of the technology that NYSE Euronext acquired that is more commonly deployed behind broker firewalls.
"We found we had assets in the portfolio that were never traditionally presented or explained to the exchange - they were set up behind the broker's firewall for brokers to offer high-speed risk-managed DMA for their most aggressive clients," says Mr Tierney.
Bursa Malaysia was among the first exchanges to take the DMA solution and put it within its infrastructure to offer on a service basis to all market participants. It has since gone live with an offering in its derivatives market, focusing predominantly on palm oil contracts and more recently the cash-equities market.
The concept, often called 'sponsored' DMA as opposed to the traditional broker risk-managed or 'naked' DMA, is now being considered and implemented at other exchanges worldwide, including Singapore and Australia.
"Sponsored access is a hot topic - we've since deployed it in front of our markets in the US," says Mr Tierney. "And [we] are now doing it in Europe, both for cash and derivatives. The SEC has been through it and it has been out for comment to the industry as appropriate market infrastructure to have in front of a market."
The concept is popular with high-frequency traders because they get anonymity and performance - their trades go straight to the exchange and not brokers' premises. The brokers like it because capital expenditure investment is minimal and the mid-tier players are particularly happy as they get more of a level playing field. Regulators like the concept because it stops arbitrage on the different levels of risk management that brokers in a particular market apply to DMA clients.
Trading block
With 2010 likely to see some fragmentation in Asia-Pacific markets as competitors test the water, there is another counter-trend to this - greater linkages and co-operation among incumbent national exchanges, particularly in the Association of South-east Asian Nations (Asean) block.
NYSE Euronext has been selected to provide the common customer gateway and network to enable greater trade into Malaysia, Philippines, Indonesia, Vietnam, Singapore and Thailand. The company's market practice experts have also been working with project participants to help harmonise clearing facilities, commission issues and regulation to make it feasible and attractive for international investors to trade Asean as a block.
At the time of writing, a more concrete announcement on the Asean board detail and timeline was expected by February 2010 - just adding to the many initiatives that could dramatically change global investing and the brokerage business in the region over the coming year.
