I participated in a series of Fragmentation Forums in Asia last week. Just like previous events in Tokyo the events in Hong Kong and Singapore were very well attended showing that interest in fragmentation is now very much a global phenomenon. One of the key messages that seemed to come out was that offering better execution doesn’t have to be driven by a regulatory mandate. Instead, the drivers shaping the buy/sell-side relationship in Asia are going to be the ability to give customers choice and the ability for different brokers to gain competitive advantage through smart order routing.
The other key message is that fragmentation will proceed at different rates, and in different ways, across different Asian countries. So, it seems that the consensus was that Japan and Australia look like being fertile grounds for alternative lit venues whilst other Asian countries would probably be dominated by dark pools. As in the US and Europe, however, there is still confusion over the discretionary pools operated by brokers and the non-discretionary pools operated by exchanges and other alternative venues. The first is simply an automation of the traditional ‘upstairs’ trading activity by brokers trying to find the other side for a trade. In this instance, the broker is operating on a discretionary basis and the value of the relationship he has with his client will be reflected in the overall matching process. Venue operated dark pools are non-discretionary in that trades will execute as long as the appropriate criteria are met regardless. The problem is that technology (and regulators) are making them appear more and more alike when, in fact, there are subtle but significant differences between them.
The final message was that good old chestnut, clearing. As we saw in Europe, multiple clearing venues can make it harder rather than simpler to trade across multiple venues. This is because if different venues are associated with different clearing operations then the smart workflow between them is harder to accommodate. On the other hand, a lot of lessons have been learned in Europe on this one and so it may not prove such an obstacle in the medium term.
If you want to find out more about Asian trading generally then I would recommend you visit www.asiaetrading.com. It’s full of interesting information about how markets are structured in Asia and how they are developing. Also, Steve Edge, who runs the site, provides a useful and entertaining commentary on events across Asia – well worth a look.
Finally, back in Europe looking forward to seeing what happens in Spain now that some of the structural obstacles are being removed. Spain certainly has a lot of ground to make up as the FFI for its main index, the IBEX 35, is barely over 1 whilst the same figure for the other major European countries has been well over 2 for a long while now.