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Asian Exchanges – The Awakening (Part I)

By Stephan Stadelmann, FINETIK

Published in AsiaMarketsIT.com on 01 Apr 2007 12:35:53

The Asian Century

During the past decade, Asia has fallen periodically in and out of favour with investors globally. Excitement has been followed by caution, which has been followed by excitement once again. Today’s focus on Asia, which owes much credit to the rise of the Chinese and Indian markets, shows signs of becoming a stable period of global investment into Asia. It is no coincidence that some analysts have called this the “Asia Century”. Against this backdrop, the exchanges in the Asia-Pacific region have lagged behind their US and European competitors (with perhaps the exception of the Australian Stock Exchange (ASX)).

However, with hindsight, this could turn out for the better for Asia’s exchanges, as it gives them ample opportunity to study the ingredients of past successes and failures. Governments in Asia are much more involved in the business of exchanges than in Western countries, and the process of deciding on change, and how to execute such change, can be cumbersome, and might follow paths that are not always obvious to the observer, or to external firms that decide to pitch for any business with Asian exchanges. However, once Asian exchanges have decided to make change, they tend to be genuinely determined to carry it through.

Challenges and Opportunities

The challenges and opportunities facing the exchanges and their market participants in what is the fastest growing part of the world are substantial.

Let’s look at China, where 2.5 million new investor accounts were added to the Shanghai Stock Exchange (SSE) in 2006 alone, making a total of 41 million accounts. The Shanghai and Shenzhen Stock Exchange exceeded a combined 80 million registered accounts in Q1 2007, and there is no slowdown in sight. SSE’s existing trading system is scheduled to be replaced in Q3 2007 with new generation trading systems designed to accommodate at least 80 million accounts, 20,000 order matches per second and a scalable minimum of 63 million executions a day. The new systems will cater for multiple asset classes such as cash equities, funds, warrants, bonds and financial and commodity derivatives.

Another much talked-about market is Vietnam’s HoSTC (Ho Chi Min Securities Trading Centre). HoSTC is at a very different crossroads on its path to growth and deregulation from that of the SSE, but there are similarities. HoSTC is also doubling its number of trading accounts, and the pilgrimage of foreign institutional and retail investors into Vietnam is ongoing. The demand for investing into the exchange manifests itself in some very peculiar forms: for example, travel agents in Japan sell tour packages to Vietnam that offer tourists the opportunity to open “a trading account (on HoSTC) after your tour of the Museum of American War”. Such tactics aside, the order placement, matching and trade execution processes on HoSTC are still extremely laborious and manual today. By May 2007, continuous trading will be introduced, and by mid-2008 a new trading system with electronic direct market access (DMA) is scheduled to be in place.

From a technology perspective, the global FIX protocol standard has been accepted by stock exchanges in the Asia-Pacific region. However, though interest is on the rise, adoption in practice is slow. Exceptions to this are ASX, leading the way in Asia (using FIX for trading and market data), followed by the Singapore Stock Exchange (SGX). Bursa Malaysia (BM) and the Stock Exchange of Thailand (SET) are following, by launching FIX connections to their trading terminals. China’s Shanghai and Shenzhen Stock Exchanges are leveraging the concept of the FIX protocol, albeit in a modified form: they are using what they term STEP, Securities Trading Exchange Protocol, for their internal benefit.

Legacy System Replacement

There is a need for most if not all exchanges in Asia to replace their current legacy systems. This requirement is being driven by the demands of inflowing investments that compel the exchanges to cope with high volume growth and demand for DMA. While foreign market players are the driving force, domestic participants are increasingly starting to engage in DMA, and domestic trading volumes are also on the rise. Asia’s exchanges are also under pressure to extend their product ranges for foreign investors. This, coupled with the need to increase trading capacity, further confirms the trend to replace legacy systems. The Asia-Pacific region is an increasingly competitive environment in which markets are fighting for an increased share of incoming investments, and one highly visible marketing strategy is to publicise plans to replace and upgrade legacy exchange systems. This may, to some extent, explain why some of the more conservative exchanges seem to be executing such replacement projects half- heartedly in the eyes of foreign market participants and the international software firms that are trying to win these exchanges’ lucrative and prestigious technology replacement projects.

Asia endeavours to be self-sufficient. As a result, its exchanges believe there are opportunities to promote and sell their own trading technologies to other exchanges within the region. For example, SET, BM and Korean Stock Exchange (KRX) are becoming de facto technology vendors to emerging markets like Vietnam. At the opposite end of the spectrum, FT India, a trading systems technology provider, has emerged as a dominant exchange in India with MCX (Multi Commodity Exchange), and owns part of DGCX (Dubai Gold & Commodity Exchange). FT India is currently expanding its activities through active involvement with other exchanges in the region, providing consulting and trading systems.

Market Data

On the market data side, the SSE Infonet business of the Shanghai Stock Exchange launched in Q2 2006 a new level 2 market data feed with a new stringent business model for the exchange data industry. The Hong Kong Exchange (HKEx) and SSE Infonet have now agreed to distribute each others’ market data feeds for cross-listed and specifically selected stocks. Similarly, the Tokyo Stock Exchange and the New York Stock Exchange have agreed to a cross-continental distribution of some of their data.

Another hot topic within the Asian exchange industry is the merging of separate exchanges for cash products, financial derivatives and commodities derivatives, with all the implications of such moves for products and technology.

Last but not least, the expectation of cross-country exchange mergers and alliances has been fuelled by a recent flurry of (often vague) memoranda of understanding between several exchanges in Asia and European and US exchanges wishing to create a presence in Asia.

The activities among Asia’s exchanges in 2006 and early 2007 are only the tip of the iceberg. Stay tuned…

Stephan Stadelmann is a founding partner  of FINETIK Partners.
http://www.finetik.com

Filed under: Asia, Australia, China, Data Vendor, Exchanges, FiNETIK Articles, FIX Connectivity, Hong Kong, India, Japan, Korea, Library, Malaysia, Singapore, Thailand, Trading Technology, Vietnam, , , , , , , , , , , , , , , ,

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