A game of musical chairs

By Rodney Diola

Asian euphoria over the region’s healthy economic growth remains strong and explains why the mood among transaction bankers around the region is upbeat, despite the extended blues on interest rates and what has become a rampant game of musical chairs among senior executives.

The number of senior transaction banking executives hopping from one bank to another grew this year, creating the impression of turmoil and uncertainty in an industry that had for long thrived in obscurity and in the absence of any tabloid-type excitement. The sweeping changes in senior personnel have disconcerted large corporate clients and investors, worried about possible effects on the delivery of services.

Noting that his bank too has conducted its high-level poaching of talent across the industry, Richard Brown, Asia-Pacific head of treasury services at BNY Mellon, expresses the belief that the banks that bear the brunt of the poaching will likely have a harder time ensuring the quality of their service. “An institution needs to provide consistency in the quality and level of its service and that is not likely to happen when you have a slew of senior people leaving.”

Corporates can face a barrage of issues with local banks in different countries, according to Brown. “They need to talk to key banking and payment providers and it is important that they are able to talk to people they trust.”

The most established providers of cash management and trade finance services have not been spared. The likes of Deutsche Bank, J.P. Morgan, Citi, Royal Bank of Scotland (RBS), Bank of America Merrill Lynch (BAML), and Standard Chartered Bank have witnessed high-level departures, the obverse of high-level hirings, creating quite a buzz in the industry.

The departure of Thomas DuCharme from Deutsche Bank as head of its global transaction banking was one of the most talked-about developments and his appointment seems to have triggered a major shake-up in J.P. Morgan’s transaction banking business that has seen most of its talent fly to other banks. His hiring into J.P. Morgan neatly signalled the bank’s ambition to chase corporate clients across the region.

From BNY Mellon’s perspective, the freer movement of people was welcomed since the bank is now in a period where it is actively hiring staff, especially in Asia. “That has enabled us to grab some people that in a normal market we would not have been able to,” comments Brown. The group announced recently the hiring of a new head for treasury services in Japan who used to work with Chase and a new head for transaction banking in Malaysia who was from J.P. Morgan. (Other J.P. Morgan transaction bankers have been hired in HSBC, RBS and BAML.)

Balancing growth and risk

Neil Daswani, the head of transaction banking for Northeast Asia at Standard Chartered Bank, says his bank too experienced poaching of senior people, but has gained more by hiring first-rate talent that was available in the market. “We always run the risk of becoming the training school for other market players, but the bank’s strong performance and reputation have become a magnet for the best talent across the region.” The bank hired S.W. Hong, who used to be the head of

Citi’s global transaction banking services in Korea. “We have built a dream team in Korea,” Daswani enthuses. In Japan and Hong Kong, people have been hired with investment banking background and other broad areas of expertise. Daswani believes that the best way to stop poaching is building an appropriate career path for your best talent.

Asked what could cloud the prospects for the bank in the near term, Daswani argues that a bank’s success in transaction banking all boils down to fully understanding the needs and situation of the client. “We help our clients early on to identify mismatches in their balance sheets – whether those are due to currency exposures or short-term funding needs.”

The team is currently actively responding to changes in accounting practice in Korea. “We are helping large Korean conglomerates to restructure their balance sheets with regard to receivables in their working capital cycle (and providing additional protection through trade credit insurance) and we can extend credit to some of their distributors to help our clients develop new markets,” explains Daswani.

He describes 2010 as a challenging year for all transactions bankers. “At the early part of the year, there were worries about sovereign defaults and contagion risks. The fear has somewhat receded but ‘double dip’ are words that our clients still use.”

However, he believes that the best barometer of how much things have changed is that their clients are more upbeat than they used to be 12 months ago. “That’s evident from the order books; inventories are being restocked across all buyer locations. Things are a whole lot better. And there are a good many positive factors going on for Asia.”

The continued foreign direct investment into Asia and outside Asia has had a knock-on effect on the transaction banking world, he remarks, especially the continuing Chinese investment in Africa. “China is rapidly catching up with the US as potentially the largest global manufacturing economy.”

Robust growth in Asia

Michael Vrontamitis notes there is a consensus that the global economy is not out of the woods yet. The regional head of product management (Northeast Asia) for transaction banking at Standard Chartered Bank urges caution when looking at the overall economy. “We continue to manage cost growth carefully in line with our revenue growth. While we consciously invested through the trough, we didn’t extend ourselves to other products or countries that we did not understand. We stayed in Asia, Africa and the Middle East.”


Kanthadai: Growth has become the main theme in client conversations
“The industry has adopted a wait-and-see attitude as to where the global economy will wind up,” agrees Brown. Sridhar Kanthadai admits that Citi remains cautious about where and to whom it commits capital, considering that the low interest rate environment is narrowing margins and that the mood across the region has been temporarily tempered by what is happening in the US and Europe. But the managing director and head of treasury and trade solutions for Asia-Pacific at Citi notes that overall revenues and profits have climbed and he is confident that his team will be able to deliver on the commitments to shareholders this year.

Citi’s appetite for risk has grown, according to Kanthadai, and its trade book has gone up by almost 60% in the last two quarters. In Kanthadai’s view, it is quite apparent that the region as a whole – having largely been insulated from the weakness overseas – is returning to a period of robust growth, even as uncertainty hounds an economic recovery in the US and Europe. “Trade volumes have picked up and the utilization of containers has returned to full capacity. In the way they engage us, clients are phenomenally more active now than before,” notes Kanthadai.

Catering to institutional clients around the region, BNY Mellon received many more deposits during the crisis,” notes Brown. “This could be a function of our financial strength. Or it could be a reflection of the ongoing uncertainty.”

Gravitational shift

A major change is under way across the transaction banking industry in the region. Western banks that used to care little about domestic businesses have been pouring resources into the region and are growing more focussed on building the corporate side of the business.

As a result of the realignment of attention among major players and the reinvigorated focus from challengers – new and otherwise – the industry is again redefining itself. BAML, RBS, ANZ – as well as a host of domestic Asian banks including DBS Bank, ICBC, Bank of China, CIMB and ICICI Bank – have expressed their intention to achieve a more regional scope for their business.

Tempered excitement
Corporate caution hangs in the air

Citi’s Sridhar Kanthadai says that while risk remains a major concern among corporates in the region two years after the global financial crisis, growth has become the main theme in their conversations with clients

Two years after the global financial crisis, treasurers across the region have yet to regain a freehand in deciding on costs and expenses. Citi’s Sridhar Kanthadai says the mood across Asian corporates is optimistic but cautious and that makes sense because a lot of things can still go wrong and a fair number of companies need to steel themselves to all kind of surprises that can happen in the market. “Risk remains a concern among companies and that’s where creative structures are required.”

“A lot of corporates are making a real effort to keep costs and expenses under control in this kind of environment. Credit remains tight and the companies themselves have grown cautious in terms of how much credit they want to put on the table,” remarks Kanthadai. “It is obvious, however, that they want to support their business to be able to sell in the rapidly improving environment.”

Considering that the level of confidence has see-sawed this year, Kanthadai sees companies shifting their focus towards better risk management. “They have become keener on addressing gaps in their processes, especially in receivables management.

It is a dynamic process evolving. Companies are trying to drive efficiency using liquidity and they have learnt their lesson well about managing their risks and getting insurance intermediaries to step in and take risk off their books. And they want to make sure that their financing supply chain remains viable.

Capital investments are coming back but this mood is tempered with a strong sense of caution as there are still a lot of issues around supply chain stability. While a fair number of corporates are swimming and enjoying a flood of liquidity, there are concerns about how to best manage the supply chain.”

Client activity picks up

Kanthadai says another concern is about operating efficiency and being able to drive more changes and more efficiency in their operations. This desire to engage the bank has been reflected in Citi’s pipeline revenue, which has grown 35% on a year-to-date basis. “These are annual revenues of deals that come to fruition,” Kanthadai explains.

“Actual sales from new customer mandates have gone up 30% year-on-year and in August we had a significant pick-up of volume in client activity.” The bank has experienced tremendous growth in deposits, committed capital and trade assets, according to Kanthadai. In their conversation with clients, growth has become the theme in Asia, he notes. “They believe that growth prospects in the region are still sustainable. This explains why Citi does not have the concerns in Asia that it potentially has in other markets.”

There has been significant growth across the board. In the airline industry, for instance, airline companies are again showing full capacity while shipping companies have enjoyed positive growth after months of suffering from unused capacity.

Kanthadai says the larger and more established companies are certainly better prepared to cope with the financial situation seen in the last two years, while commentators feel that the crisis has served to enforce a more transparent regulatory environment.

Lending to the real economy

The credit environment is changing rapidly in China, notes Pei Yigen, who runs cash management as the managing director and product head for China in the treasury and trade solutions for Citi Global Transaction Services. Much of the lending action occurred mostly back in 2008 after the crisis hit. “This is why we experienced a significant jump in liquidity brought in mostly by local banks.

The tougher liquidity situation this year is only natural since the regulator wants to make sure the money is going into the real economy and not in real estate, for instance. The government has asked lenders to be extra cautious in approving loan applications. Other sectors, such as the consumer sector, continue to enjoy considerable access to liquidity, since the government wants them to grow further.

The major state-owned banks have become highly selective in deciding to who to lend in view of the government preferences for the growth of specific industries, such as clean energy.

Helping clients to leverage

Citi continues to invest aggressively in its transaction banking platform, explains Kanthadai. “In the last nine months, we have about tripled our client manager force that is dedicated to helping clients successfully leverage their network. “These client managers bring the power of Citi to working with the clients.” The bank has pushed hard to promote the use of pre-paid purchase cards for specific industries such as governments and public institutions.

“We have expanded the wholesale card platform into 12 countries in the region and we have significantly increased the pipeline and the deal flow,” comments Kanthadai. “It is a natural fit into our cash management business since it helps clients to control expenses. It is not about getting a larger spread from clients. Rather, the idea is to provide customers with a convenient way of making their payments, that is efficient and compliant to policies.”

Enhancing cash flow visibility
RBS offers clients more responsive services


Goodyear: Enhancing our platform in China
Tougher market conditions have made it more difficult for corporates and institutions to consistently arrive at an accurate forecast of cash flows. Transaction bankers say the volatility across markets and asset classes has made it more challenging for treasurers to manage cash. Corporates are increasingly concerned that liquidity could get tighter, once the effects of inflation and volatile exchange rates are factored in, believes Alan Goodyear, head of global transaction services for Asia-Pacific at The Royal Bank of Scotland. The rising prices of major commodities have already sparked fears of an inflationary spiral which has contributed to volatility in interest rates and foreign exchange.

“With income from investments much less dependable and delivering smaller yields than they used to, corporate customers realize that they need to hold more cash in hand,” Goodyear explains. “They appreciate how important it is to be able to obtain dependable commitments from their banks on credit lines. If they are holding a significant amount of excess cash they need to find a place where they can park it and extract yield – which is particularly challenging in the current low interest rate environment.”

Greater visibility

This is the reason, according to Goodyear, why RBS is working closely with clients to help them gain a better understanding of their cash flows. “We help our clients achieve better visibility of their cash flow by enhancing the responsiveness of our services to them.” This year in fact, the bank has launched an improved online client service capability.

Clients who avail of the bank’s electronic channels can now communicate to its team through a dedicated online service request system, 24 hours a day. RBS has been rolling out more features for electronic bank accounts, notes Goodyear. One of those features gives clients the ability to change signatories or alter authorities in payment instructions via online request. “In a period of economic stress and difficult market conditions, a whole lot of companies suffer staffing volatility. If you happen to be a company where the treasurer resigned suddenly, then you need to have the ability to gain greater control of your books and immediately override the authority of that treasurer to make payments.”

Stepping up in China

Goodyear says he is positive about the ability of the RBS transaction banking team to grow the volume of its business in key markets, such as China. “We are, in a significant manner, investing in enhancing the capability of our platform in that country.” In China, adds Goodyear, RBS is working through locally incorporated entities that were bought from ABN AMRO. “We want to make sure that our electronic channels in China are capable of serving tailored and complex customer requirements. We already have the local language capability and the internet platform and we want to ensure that host-to-host exchanges are up to standard. The issue in the processing side is to enhance the straight-through nature of what we do.”

Regulators in China have issued stricter regulations concerning the examination of flow payments, Goodyear notes. Measures have been imposed that allow authorities to better track and control the purpose of payments. A good example would be the requirement for banks to know precisely how the money that is lent to individuals or companies will be utilized. “They don’t want that money to go into the stockmarket or the property market. But the necessity to have a record of the underlying transaction often inhibits us from accomplishing straight-through processing.” To ensure that additional requirements do not unnecessarily inconvenience customers, RBS uses a “market-leading client-servicing platform”, in the words of Goodyear.

Strong synergy

“The Asian transaction banking business was a crown jewel in the acquisition of ABN AMRO back in 2007. ABN AMRO’s strong client franchise and local markets knowledge across Asia have further enhanced RBS’ position as an international transaction bank. As one of the top ten banks in the US and a leading bank in Europe and the UK, we are well positioned to bring global connectivity to our clients,” enthuses Goodyear.

“In fact, we have recently inked a partnership with the UK Trade and Industry to help UK companies seek opportunities and grow in Asia.”

Treasury to the fore
BAML goes all out to strengthen global corporate banking

Bank of America Merrill Lynch is sparing no expense in building its global corporate banking capability in Asia. The bank made waves in the corporate banking space early this year after it announced major hires from established transaction banking players. More hires will be announced this year, according to Ivo Distelbrink, the head of global treasury services, Asia-Pacific

Distelbrink: Top-tier targets
Six months since his appointment as the Asia head of global treasury services at Bank of America Merrill Lynch (BAML), Distelbrink has grown more confident than ever that the bank will become a major player in the region by attracting multinationals, large cap local corporates and financial institutional clients to its global treasury services offerings.

In an interview with The Asset, Distelbrink says the build-up of their transaction banking business in Asia continues and that more significant hirings will be announced in the next few months on top of the key hires made earlier this year. “The transaction banking business is ultimately about having the best people, the best technology and the best servicing model,” remarks Distelbrink. The hiring will double headcount by the end of this year from where it was at the start of the year. “Most hiring is done in product management and in sales consulting roles to drive market leading treasury and trade solutions for our clients. We expect the hiring to continue into 2011 and 2012 as we expand across the region.”

Early this year, BAML made waves in the corporate banking space after it announced major hires of well- known talents from established rivals. Distelbrink was one of those hires, joining BAML in March where he has taken the responsibility for treasury and trade services across client segments. He reports to Joel Van Dusen, the bank’s deputy head of global corporate banking. Before BAML, Distelbrink was Citigroup’s Asia head of treasury and trade solutions.

“BAML is committed to executing a substantial build-up of its corporate and investment banking platform in Asia that can match the very best,” states Distelbrink, adding that the integration of the technology and client facing platforms of the two legacy institutions – Bank of America and Merrill Lynch – turned out to be simple.

“The corporate and investment bank operations in the region are complementary. With Merrill Lynch traditionally not being active in the treasury services business, we have focussed on giving all Merrill Lynch clients access to our leading global treasury services capabilities.” With Bank of America’s growth over the last decade through a number of major acquisitions, it had gained considerable experience in transition and integration management. “It made the integration with Merrill Lynch so much easier.”

Capturing the top tier

Eighteen months since their merger, Distelbrink says BAML’s two institutions “feel more integrated and aligned than rival institutions did with a combined corporate and investment bank”. A large number of Merrill Lynch client relationships have already been onboarded onto the Bank of America platform and the momentum continues to accelerate. Distelbrink says clients in this part of the region used to have few options in terms of credible, consistent global treasury management service providers. “For too long, corporates and FIs have not exactly been spoilt for choice in selecting a transaction services provider.”

His group, he says, will stay focussed on capturing the top tier of the market “where clients are interested in finding global solutions that are fully integrated, leveraging the latest industry standards”.

Distelbrink contends that scantily few providers in the region have delighted clients with competitive, relevant global treasury solutions. He feels the build-up of global treasury services is core to establishing a leading global corporate bank. The build-up of global corporate banking capabilities is driven by its clients, and the group’s desire to leverage the Merrill Lynch platform that was acquired two years ago. Merrill Lynch delivered Bank of America overnight a global footprint and senior access into clients around the world. Given that Bank of America in Asia already enjoys an established regional presence, with a 50+ year presence in many markets, Distelbrink considers his group is quite lucky. “We already have direct high and low value clearing and settlement capabilities wherever we want it.

We don’t have to obtain new banking licences or need to build basic infrastructure since we already have significant on-the-ground operations in all markets either through Bank of America, Merrill Lynch or both.”

“BAML,” he notes, “will continue to make significant hirings of the best in the industry, across the corporate treasury and FIG segments, disciplined market by market, country by country, product by product, function by function across the front, middle and back office.”

Rebuilding Chinatrust

By Rodney Diola

With China’s rise as an economic superpower, a decade or so down the road it won’t be hard to contemplate the following scenario: a global Chinese bank – or a set of global Chinese banks – straddling the world, offering a menu of financial services similar to those now offered by global Western banks such as Citi or HSBC and servicing non-Chinese retail, wholesale or institutional clients.

The three largest banks in the world, in terms of market capitalization, are Chinese. They may not yet enjoy the global brand recall or the suggestive animalism that Western banks exude across the global financial landscape, but they certainly have the financial clout to do so if they wish.

Unlike the sad existential cul-de-sac in which many Western banks find themselves caught, the Chinese banks are adjusting to a world where they have suddenly become the leviathan among leviathans. As they find their groove in global expansion, they are warming up in their niche and expanding aggressively across new markets, including the Middle East and Africa. Admittedly, the somewhat surreal future scenario of a Chinese bank branch jost­ling with Citi or HSBC for retail and wholesale business in a far-flung town in India or a favela in Brazil carries with it lots of ifs and buts.

One of the ifs is if they succeed in developing the ability to hire the best in the markets where they find themselves. This might already be starting to happen, though not in mainland China. Chinatrust Commercial Bank (CTCB) is the largest private sector bank of Taiwan. It may not have the size or the clout of ICBC or Bank of China, and Taiwan could be considered a mere pinprick in the vastness of the Chinese realm, but Chinatrust is behaving as if it is ready to join the major league.

In the last 12 months, no bank has pulled out more stops than Chinatrust in remaking and repositioning itself as a major player outside of the island. A year ago Jeffrey Koo, its major shareholder, hired its first Western CEO and president. A lot is now hanging on the shoulders of banker Michael DeNoma to transform the bank from an established player in Taiwan to an institution with a more regional or even global reach. DeNoma, CEO and president of Chinatrust Commercial Bank, believes that the future belongs to Chinese banks. He believes that in ten years’ time, several of them will emerge as truly global players competing with the like of Citi and HSBC.

Absolutely bullish on Taiwan, DeNoma sees the island, virtually frozen out of the world’s psyche for the past 30 to 40 years, about to begin to captivate the attention of the world as it becomes one of the most exciting stories in the region. Taiwan’s potential, he argues, has grown more compelling in view of the blossoming trade and political rapprochement with China. Over the next decade, he sees Chinatrust becoming one of the first truly international Chinese banks in history.

Taiwanese tycoon and Chinatrust chairman Jeffrey Koo has long had a dream to transform the Taiwanese leader into a global banking institution. Koo who took over the business from his uncle and Chinatrust Commercial Bank founder Koo Chen-fu was forced to surrender day-to-day management last year after a financial scandal involving his family’s stake in Chinatrust that threatened to irreparably damage the bank. Bringing in a CEO from the outside with the experience of building a global brand and franchise, he believed, was a logical and necessary next step in the bank’s evolution.

DeNoma says Taiwan’s diplomatic and political isolation from the global community for several decades may prove to be one of its greatest saving graces. “Few if any multinationals went to Taiwan in the last 30 years because doing so might have affected their prospects in China. Most of them were either in or wanted to be in China, and they didn’t want to risk that opportunity by locating in Taiwan.”

Such decisions proved a boon, however, to indigenous entrepreneurial Taiwan companies, allowing them to grow unhampered into global players “This is one reason why Taiwan has many world-beating high-tech champions.” He points that in 2008, Taiwan had more patents per million population than any country in the world and it has consistently been the fastest in patent growth per capita over the last decade. Few realize that Taiwan companies currently account for 80% of global smart phone production worldwide. “I would not bet against Taiwan,” says the ex-Standard Charted Bank executive who has become the first foreigner to ever run a Taiwanese bank.

DeNoma recalls that when Michael Porter, the highly respected strategist, visited Taiwan earlier this year he was moved to describe it as the most innovative place in the world.

The challenge for the Taiwanese banking industry is that Taiwan, for the most part, missed the Asian financial crisis, notes DeNoma. “The positive in the Asian financial crisis of 1997-1998 was that it forced consolidation in most of the region’s banking markets. So while virtually everyone else consolidated, Taiwan did not.” It still has too many banks which has prompted severe competition for survival. This, he confides, is the crucible, which has forged the strength of Chinatrust. “The trees with the deepest roots are those that face the strongest winds growing up,” he points out.

“My point is that if you wanted to set your foundation for an attempt to build one of the first ever-global Asian banks, where would you look for your cornerstone? In the most profitable markets in the region, the oligopolistic markets, where spreads and fees are fat and banks overnourished? Or would you look for your cornerstone where competitive conditions are toughest? Where the winner succeeds because of focus, teamwork and sheer grit? A lot of fat men enter races, not many win.”
Chinatrust, according to DeNoma is a lean and mean machine with a substantial international footprint that deserves to make its mark in global banking.

He is unconvinced that Chinatrust’s main rivals from Taiwan, have the necessary networks to become global banks, yet. And more specifically that while some might be ahead in establishing a presence in China it does not mean that the race is over. “China is a marathon with much less than a kilometre run, there’s still a long way to go.”

Taiwan is by many measures the most competitive banking market in the world, DeNoma points out, with razor thin margins. “For the same risk-rated corporates, we can get 100 to 300bp more outside Taiwan.” Despite the tough competition, he says, CTCB has been the profit leader in the industry this year because it has already achieved deep penetration of the market.” To be successful you need scale here and we’ve got that. We are going to build on that scale and defend it.”

DeNoma says Chinatrust has established positions in nine key international markets that have yet to be fully exploited. He thinks it could take 18-24 months for the bank to install extendable, scaleable competitive business models into these countries, but after that they will be capable of both organic and inorganic growth.

If all this plays out, DeNoma believes that Chinatrust will become one of the most attractive banks in the world over the next decade. Attractive to large Chinese banks because of its global network and global management skills as China internationalizes. Attractive to large Western banks because it will be one of the best managed Chinese banks in the world as China grows more preeminent on the international stage. Because it will be attractive to both, it will be able to continue to raise capital and stay independent. If everyone wants to buy, then you don’t have to sell, grins DeNoma.

The July-August 2010 issue of The Asset carries the full interview with Michael DeNoma, CEO and president of Chinatrust Commercial Bank

The Asset website is at http://www.theasset.com

A fresh start

By Rodney Diola

Private banking has been an uncompromisingly uncomfortable spot in the last three years. The global financial crisis created what had seemingly been an unbridgeable rift between relationship managers and their portfolio of high net worth individuals (HNWIs). As the crisis took hold and clients saw their wealth erode, private bankers wondered openly how long it would take for the rift to heal so they could start rebuilding.

While the situation looked better for a slew of onshore private banking operations in China and India – where HNWIs had been largely shielded from high-stake speculation in the market prior to the major bust in 2008 – for private banks in markets such as Hong Kong, Singapore and Korea – where HNWIs suffered substantial declines in their net worth from securities that had turned worthless – the picture was grim. The number of millionaires in Hong Kong and Singapore shrank the most – denting the industry’s reputation – and started to recover only last year, although they are still far below the 2007 level.

Institutionalizing private banking

As Citi’s Asia-Pacific Private Bank CEO Aamir Rahim himself admits, the trust in the industry had been compromised during the crisis and there was a need to reinvent the business model so as to re-engage the HNWIs in the region.

When he joined the private banking arm of the bank in September 2008 (Rahim used to run Citi’s fixed-income investment banking team in the region), he realized the business needed some changes to retool itself for the future. High net worth individuals were in­creasingly demanding institutional-like service, so Rahim reached out to the Citi’s institutional banking franchise to improve the private bank’s product slate.

As Rahim explains it, the private bank needed to remodel both because the interest of HNWIs slipped as a result of the uncertain market conditions and because of the sharper competition from hungrier players entering the private banking space. Citi claims that it was already the largest wealth manager in the Asia-Pacific with US$165 billion in assets under management, and that it was anxious to become “the benchmark for private banking in the future”. Bringing an institutional flavour to the bank was one strategy to achieve this, but Rahim decided to restructure compensation too. The old commission structure went out the window and both bankers and investment specialists are now judged on a scorecard, which comprises a comprehensive matrix to determine how clients are being served.

In addition, Citi refined its private banking client segments to improve client servicing. Before the crisis, it was not uncommon for the franchise to have a diverse spread of clients with varying levels of assets, Rahim recalls. “It was dealing with customers worth as little as US$1 million to US$20 million and with those worth US$100 million to US$1 billion. Citi has put in place a comprehensive wealth continuum that serves clients with assets from US$1 million to US dollar billionaires. Its private bank focusses on ultra-HNWIs with a net worth of US$30 million. The fact that rich Asians have been aggressively building their wealth has required the different approach,” Rahim points out.

“Our client segment is clearly defined now and we have been able to build a differentiated and high-end private banking model to serve our clients while keeping expenses under control. Clients are looking to expand their wealth across the globe and we are leveraging our globality to provide them best-in-class service.”

Rahim describes the new approach as a win-win situation for the bank and the clients: “We have found that the new model works better because clients have gained access to the best Citi has to provide, which in turn strengthens our relationship with them.”

The traditional model of private banking is clearly falling by the wayside and the stereotype of the old, cigar-chomping conversationalist type of private banker has been relegated to history. “If you go out there and talk to tycoons, you had better make an immediate impact,” comments Rahim. “They have limited time and so you have to make a pitch that will command their attention.”

What has helped to increase the attraction of Citi’s private banking services has been its ability to help clients in their IPO and M&A activities or to provide them with a good introduction to countries where they see strong potential but where they are unfamiliar with the local culture. Private bankers do not relish being blamed by their HNWI clients for not having properly advised them on the danger from too much exposure in certain types of asset classes. That explains why they keenly emphasize how much attention they devote on providing the right risk management tools. The new compensation structure too reduces product pushing as the scorecard is designed to gauge how well clients feel their interests are being served.

Staying true to the business ideals

J.P. Morgan Private Bank too has been consistent in its moves to de-risk and deleverage. In an interview with The Asset, its new regional CEO for ultra-HNWIs emphasizes that the lessons of 2008 cannot be forgotten. That explains, notes Andrew Cohen, why we see to it that clients have sufficient risk management tools and advice at their disposal to avoid repeating the mistakes of 2008.


Dana: Clients deserve not to be saturated with products and solutions
The head of the Hong Kong and North Asia markets of BNP Paribas Wealth Management feels that private banking in general has done well, despite the crisis. Thierry Dana, who moved to Asia in September 2009, admits that private banking has become more demanding as client needs have grown and as complex products in the industry have proliferated in the last couple of years.

Dana is dismayed at the number of private banks that are pushing products without making sure that the client understands what those products are. “Clients deserve to receive sound advice and not to be saturated with products that come out every other day.” He acknowledges the growth of the competition, the arrival of hungry new comers which “might not exactly mean the delivery of better private banking services”.

Dana is a strong believer of values. “One needs to build one’s strategy based on values – individual and corporate.” The challenge, he says, is to better manage the risk facing clients while staying true to the ideals of the business. His bank aims to build long-term relationships, where clients seek out bankers for their responsiveness and effectiveness. “They want speed from us when we react to their demand, so we need to have the capability to immediately assess the impact of whatever situation or development and identify the investment opportunities that are available to them. This explains,” he adds, “why BNP Paribas always works to enhance the efficiency of the decision-making process.

Dana says his experience as a private banker around the world, and especially in Latin America, has prepared him for the challenge of nurturing the franchise in Asia. “Wealthy Asians and South Americans, Brazilian clients in particular, have a lot in common. They don’t suffer from boundaries or constraints on how to operate and they want to invest and diversify the wealth of their families.” In the Asia-Pacific region, Dana explains, BNP Paribas chiefly targets entrepreneurs, as they have demonstrated an eagerness to work with a good partner bank to help them grow their wealth.

Asia is different

Private banks can count themselves lucky to be in Asia where it seems the only way a private banking franchise can fail is to be clueless about the phenomenal transformation that has taken place in the last five years. The difficult economic conditions in developed markets such as the US and Europe are driving a host of private banks to zero in on the region, where the number of millionaires is growing steadily. Asia, however, poses a different challenge for private bankers, in particular for those concentrating on offshore banking for the region’s wealthiest.

Rahim says Asia is different because the accumulation of wealth at every level is so new. Unlike in Europe and the US, private banking in Asia is about dealing with issues facing first generation HNWIs. “For the most part, the ultra-HNWIs are still building their fortunes and are in aggressive mode when it comes to investing. In addition, their investing is truly going global.” Another marked difference is that approximately 80% of corporates in Asia are controlled by families, whereas in Europe and the US the number is only 15 to 20%. “This translates to a significant difference in how you serve the people in Europe and in Asia.”

The potential generational transfer of wealth is one reason why Citi private banking runs its ‘Next Generation of Wealth’ programme, which started in Asia in 2003.

The programme is designed to impart financial knowledge and soft skills to scions of wealthy families and this year’s event saw 100 young adults gather in Hong Kong for the occasion.

That the potential of the region has grown is reflected in the movement of talent to Asia. A few months ago, Cohen of J.P. Morgan moved from California to Hong Kong to head the group’s Asia-Pacific business for ultra-HNWIs. Swiss banking behemoth UBS continues to lose talent to its competitors – who admit that the bank remains a formidable private banking presence in the region and across the globe, even if it has been set back as a number of its executives have been poached. The most recent is Michael Benz who is joining Merrill Lynch Wealth Management next year to become its head in the Asia-Pacific.

His departure follows the defection of other senior UBS private banking officials to rivals such as Credit Suisse and Julius Baer. Benz replaces Antony Hung, who has retired. Wilson So, formerly head of North Asia Global Wealth Management, now serves on an interim basis as head of the wealth management unit.

The departure of Benz came as a surprise as, only early this year, he had assumed responsibility for the bank’s newly created investment products and services unit in the Asia-Pacific.

Citi too has been aggressively hiring. Rudolf Hitsch from Goldman Sachs takes over the Hong Kong-based offshore China role. Hitsch is responsible for Citi’s offshore China private-banking franchise and reports to Aamir Rahim in Hong Kong. His appointment follows that of Debashish Duttagupta, head of investments in the Asia-Pacific and BK Jung, head of South Korea.



The genie of the lamp
HNWIs expect bankers to fulfill all their wishes

The lifestyle of the rich and famous is different from yours and mine. “They travel around the world when they are hungry,” says one private banker who narrates how a client in Singapore flies his family to Hong Kong in his jet to have dim sum at The Peninsula in Kowloon. To be super-rich is to have your private banker at your beck and call to fulfill all your wishes – even to the point of actually forking up the funds to sustain your inimitable lifestyle – something akin to having the genie of the lamp.

“What they are looking to have is a high level of service and high-quality ideas,” says one private banker whose services are so much sought after by the tycoons that he is invited to weekend dinner parties to get closer to the family.

The services availed can go from helping them network with generals and politicians in the country where they are building a factory or it could involve the mundane task of helping the client’s children get into a US college and find suitable accommodation.

“They don’t call to check whether they can rent an apartment. Instead they ask me how they can buy a brownstone and that will cost them something like US$10 to US$20 million. Then they will ask us if we can finance them and we usually do.”

Recently, mainland Chinese clients wishing to do business in Africa have been some of the more avid users of such service, asking to be introduced to various important people, such as the CEO of the largest company in a country, the politicians or the central bank governor.

The banker says offering those types of services has become an important part of their work, considering that they are servicing mostly entrepreneurs with multi-billion dollar empires, often too busy to attend to the needs of their families.

The wealthy never run out of options. While the recent global financial crisis might have made them think about the transience of wealth or their vulnerability to another meltdown, they are unlikely to get affected by any economic cataclysm, no matter how bad it gets.

A recent Credit Suisse Wealth Report finds, for instance, that in spite of a decade of near zero real returns on equities, several equity bear markets and the collapse of housing bubbles, global wealth has risen by 72% since 2000. Strong economic growth and rising population levels in emerging nations have been important drivers of this trend.

The head of the wealth per adult league table is dominated by smaller, dynamic economies such as Singapore, Switzerland, Norway as well as France and Australia. Argentina, Japan and Iceland are among the laggards. Notable cases of emerging wealth are found in the Czech Republic, Slovenia, Chile, Malaysia and South Africa, while “frontier” wealth is evident in Colombia, Indonesia, the United Arab Emirates and Kuwait.

The report notes that wealth is unevenly distributed with the bottom half of the global population possessing less than 2% of the global wealth. In sharp contrast, the richest 10% own 83% of the world’s wealth, with the top 1% alone accounting for 43% of global assets.

Finally, a pan-Asian exchange?

Singapore Exchange’s (SGX) US$8 billion bid for the Australian Securities Exchange (ASX) came as a surprise. When two major national exchanges, power houses in their own backyards, propose integrating their platforms into one and construct a larger market for their nationals to trade, it’s a deal that makes the world sit up and take notice.

Is Asia ready for a pan-Asian exchange straddling national boundaries, time zones and regulations? The idea has been brewing for decades, but when it finally took concrete form through SGX’s ambitious bid, it seemed to have transcended the purely commercial considerations driving the deal. Taken in the context of how the world’s economic gravity has gradually shifted to the region, it assumed a symbolic and geopolitical significance too.

What made the proposal more compelling was that it came at a time dominated by talks of brick and mortar national exchanges going the way of the dodo, if they fail to stop the accelerating migration of market players to alternative trading systems that provide faster execution at lower cost.

Clear advantages

The benefits of a merger for the incumbent exchanges are obvious. Provided its cost does not explode, the merger would translate into a larger pool of liquidity and possibly cheaper execution costs. SGX would benefit from the listing of globe-beating Australian mining companies such as Rio Tinto and attract more of the pension funds that Australian asset managers are investing outside Australia. Singapore-listed start-ups would benefit from cheaper funding to fuel their ambition to become world-beating giants. A merger could boost liquidity for Australian stocks and give them more global appeal.

Even more riveting is the prospect that such a merger could spark a major consolidation of stock exchanges in the region and even lead to the creation of a pan-Asian stock exchange rivalling, in pre-eminence and dominance, those in the US and Europe, and thus providing the necessary infrastructure to symbolize the region’s rise as an economic superpower.

Those not entirely sold to the idea of the deal argue that the reality is less buoyant and point to misgivings about whether such an M&A exercise is worth the effort in an industry facing tough competition from more efficient players and whether the danger exists that a merger saddles the surviving exchange with debts that cripple its competitiveness against other platforms.

But combining systems and infrastructure located in two different jurisdictions won’t necessarily impact the end users, Instinet CEO for Asia-Pacific Glenn Lesko points out. “You don’t see Singapore stocks trading in Australia or Australian stocks trading in Singapore now, and that is because there are different regulators, settlement systems, and clearing involved across markets.” If nothing else changes besides ownership, it may be too complex for cross-border trading to happen in any meaningful way, he suggests. “Unless clearing and settlement and regulations change, it will just be one exchange owning the other, with no real change in the way stocks are traded in either country.”

The more complex trading structures resulting from a merger means the surviving exchange could be dependent on expensive technology solutions.

The difficulties facing the exercise have stirred speculation that the executive board of both exchanges may not have fully considered the ramifications of such a union and the SGX may have gone out for it, simply to put one over Hong Kong, its most prominent rival in the region. SGX officials may bristle at the suggestion that their market remains a global trading backwater, but the truth is that despite all the sophisticated platforms which SGX has created to attract liquidity from all over the world, it has yet to receive the level of attention which the Hong Kong exchange currently generates among global traders and investors.

The latter has enjoyed an edge in recent years on the back of its bulging menu of red chips, H-shares as well as other mainland Chinese and regional enterprises traded on its board. SGX is determined to catch up and join the global league and it looks like a window has opened, enabling it to do so.

Threat from alternatives

The gamechanger for Singapore unexpectedly came from alternative trading systems, trading platforms that are starting to roll (albeit in a slow fashion) into Asia, but whose impact is likely to grow into gale wind force in the way shares are bought and sold among traders and institutional investors. Insecu­rities brought about by the looming entry of these trading platforms into Australia prompted the executive board of ASX to scramble for a deal with SGX that will see them combine into a regional exchange with pan-Asian ambitions.

The recent manoeuv­rings have contributed to the less than sanguine view that the merger is the end-game for an industry threatened by fragmenting liquidity, as trading migrates to exchanges where alternative trading platforms offer cheaper and faster trades. Hence the view that the ASX-SGX merger could be the clearest signal of a dangerous turn in the fortunes of exchanges across the region.


Chew: Rationale for merger is to enhance competitiveness
Chew Sutat does not view it in that way. SGX’s executive vice-president for corporate and market strategy believes that the merger will in fact enhance the competitiveness of these senior exchanges. Speculation in the international media that the merger reflects the incumbents’ fear of competition is unwarranted, argues Chew, pointing out that SGX has always been proactive in launching new products, especially derivatives. “SGX does not view alternative trading platforms as a threat, but rather as a complement to the development of local markets. Just as they do in the US and Europe, alternative trading platforms enhance depth and liquidity in the markets in which they operate.” Is Chew sugar-coating reality?

Alternative trading systems such as Chi-X have taken a large chunk of trading volume away from traditional exchanges in the UK and Europe and they are making inroads into Asia. Their threat has been acknowledged by ASX CEO and managing director Robert Elstone, a proponent of the merger, who told analysts in a briefing on October 25 that the decision by the Australian government early this year to grant Chi-X a licence to operate in Australia was an important factor that prompted the ASX executive board to finally bite the bullet and hitch the future of the exchange with SGX.

It was the gamechanger. “The ASX cannot afford any longer to be a purely domestic operation,” opines Elstone. “It has to become more international to be able to counter the threat to its future growth and margins.” He believes SGX will be the ideal partner to achieve that in an environment that is changing rapidly for exchange operators across the region.

The consolidation among brick-and-mortar exchanges is nothing new. The current ASX is, in fact, a merger of the old ASX and Sydney Futures Exchange. And ASX and SGX had formed an alliance in 2001 to make it easier to trade stocks in both countries, although the whole operation got quietly wound up because of the lack of interest and the dearth of liquidity. But the idea of working together and possibly merging with SGX has never gone away over the last 10 years, according to Elstone. “ASX has been in constant discussion about such a possibility, but the course of action didn’t crystallize until two years ago,” referring to the vast changes that have swept through global trading of equities.


Elstone and Böcker: SGX would benefit from the listing of globe-beating companies while ASX can boost its liquidity
The financial wherewithal is key for the merger to proceed. SGX CEO Magnus Böcker noted during the presentation of the deal to analysts that banks are strongly supportive of the deal with credit lines and will charge for those loans based on SGX’s investment-grade rating. The entities involved, he says, have strong cash flows and so will be able to service whatever debt will be incurred for the acquisition.

A matter of pride

During the meeting with analysts on October 25, an analyst from Deutsche Bank pointed out that Elstone himself had in the past expressed caution about the level of debt that can be taken on by an exchange business, particularly one with a substantial derivatives turnover, such as SGX. Böcker, who is comfortable with the level of debt that will be incurred, replied that he and Elstone would not be sitting there if they thought that they were not creating a company that is strong and viable enough and has sufficient cash flow to answer for those debts to be incurred to complete the deal.

"We are selling the trust [in the two entities] to our customers and we could never do that if we thought the company was too weak in terms of profitability and balance sheet.”

The proposed merger will have to go through the Australian regulators and the likelihood that they will resort to an extensive public consultation to gauge the public’s reception of the agreement is high.

It has become obvious over the last weeks that a public relations war is brewing. Following the announcement of the merger., Australian press gave voice to misgivings about the deal and wire agencies reported that it has to gain wholehearted support from the bulk of Australians.

A survey conducted after the deal was made public showed that most retail investors opposed SGX’s bid with some pushing to have the deal re-negotiated and giving the same latitude of powers to each of the side. That view could place pressure on the Australian government to block the deal on national interest grounds.

Those opposed to the deal argue that a full takeover by the SGX would inhibit Australian ambitions to become a regional financial hub. In the latest Investor Pulse survey, run by market research firm Colmar Brunton, 55% of investors indicated they do not believe the takeover of the ASX by Singapore is in Australia’s national interests.

Singapore stands to gain


Gilbert: The timing is right but the political hurdles are immense
Hong Kong-based Mike Gilbert, global head of professional trading group (PTG) at Newedge, a futures and options broker, holds that the merger is a good idea when viewed from SGX’s perspective. The timing is right, he points out, in view of all the money flowing from everywhere to Hong Kong and Singapore.

But Gilbert, who is also Asia-Pacific head of sales for clearing and PTG at Newedge, believes that the political hurdles are immense. “From the reactions seen in Australia, this proposal will need to traverse a long road before it can be a reality. The Australians are proud people. They have built a robust trading environment for stocks and there is real opposition to letting a national icon go.”

Investment bankers and a battery of highly-paid lawyers have been brought to advise the protagonists. UBS is acting as financial adviser for ASX while Morgan Stanley is watching SGX’s back in the same capacity. Freehills and Stamford Law LLC are legal advisors to ASX while Allen & Gledhill LLP and Clayton Utz are serving as legal advisors to SGX.

It is worthwhile to remember that UBS played a key role in advising and engineering the merger of one of the worst cross-border deals to be conceived in the telecommunication industry – the acquisition, in August 2000, of Hong Kong Telecom by a then unknown backdoor listing company controlled by Hong Kong tycoon Richard Li.

At first, Singapore Telecom­mu­nications had expressed interest in acquiring Hong Kong Telecom, but misgivings about selling Hong Kong’s largest telephone company to Singapore scuttled the deal.

An SGX spokesperson says that if the ASX-SGX merger is successfully executed, it would instantaneously create the second largest listing venue in the Asia-Pacific region with over 2,700 listed companies from more than 20 countries, including over 200 listings from Greater China. It would result too in the world’s second largest cluster of companies in the resource sector, with more than 900 listings. In addition, the merged entity would see the creation of the world’s widest range of Asia-Pacific listed equity, fixed income and commodity derivatives.

There is scepticism about the level of synergy that can be generated from the proposed merger and some fear it could be an exercise in futility, considering the increasing virtualization of the trading environment, in particular with the arrival of alternative trading platforms in the region. Gilbert of Newedge agrees, pointing out that when you are trading across markets, for the most part it does not matter where one is located. “With the technology available, clients within Asia are able to reach any exchange. With the trading platforms we provide to our clients, there is no geographical limitation. Clients have a choice of markets to trade and may be sitting in their own office while their servers are co-located in the more prominent exchanges in Asia. Even though such trades currently account for a modest percentage of an exchange’s daily trading volume, we expect this to increase in a significant fashion in the months and years ahead.”

Gilbert warns that integrating the infrastructure of merging exchanges requires a fair amount of investment and time. He cites the ASX-SFE merger a few years ago: “Up to now, they still have separate trading engines for cash equities and derivatives. Even if they use the same system, platform integration can still trip over various interfacing issues. It may take three years before the benefits of a merger trickle through, and by that time it could be too late because the alternative trading systems would have come in.”

Rather than being an exercise in futility, remarks Matthew Gibbs, the merger will create something momentous – the premier international exchange in the Asia-Pacific. The manager for corporate relations at ASX Group argues that each exchange offers services beyond trade execution – specifically, in clearing and settlement. “Both ASX and SGX, even before the merger, are multi-asset class and vertically integrated exchange groups. Their similar business models is one of the reasons why a partnership between ASX and SGX is compelling, and why the scale advantage it offers is real.”


Lombard: Consolidation has been seen in other markets
“Consolidation has been seen in other markets of the world and it’s understandable that it’s attempted in Asia,” says Ian Lombard, the San Francisco-based COO of Tora Trading (which runs Tora Crosspoint, a crossing platform for Japanese stocks in Tokyo). “The fact is, mergers in Europe worked quite well because technology is quite expensive, liquidity can be difficult to attract and new products are difficult to launch – consolidation created strong critical mass that facilitated further advancement on all these fronts.”

Böcker says there will be important earnings benefits if the merger goes ahead, with earnings per share of the merged entity rising by around 20% every year – without taking into account the additional income to be generated because of the synergies involved. He estimates that those synergies could bring an additional US$30 million worth of savings for the whole group.

Punters at both exchanges hope he is right and that they are not witnessing the end game for exchanges in response to the rapidly evolving cut-throat trading environment.
This was published in the November 2010 issue of The Asset.

The Asset website is at http://www.theasset.com

Scrambling for liquidity

By Rodney Diola


Months before China announced its recent interest rate hike, multinational companies in China were already experiencing issues with the US dollar and renminbi liquidity in the country. The government had tightened reserve ratios for banks early in the year and continued to tweak them tighter as the year progressed.

As the Chinese government is mopping up excess liquidity in China’s financial system in the aftermath of the economic stimulus programme, liquidity in both US dollar and renminbi have turned into key issues for corporate treasurers, notes Lisa Robins, head of treasury and securities services, China at J.P. Morgan. “There was less supply of available credit, even though there was a much stronger loan demand from customers anxious to better manage their operating flows.”

“Being a financial institution operating in China, we have learned to live with evolving priorities as they relate to monetary policy,” observes Robins. “Three years ago, they were loosening and then tightening before the financial crisis. And then loosening again and tightening after that.” Most US multinational clients in China are taking no chances, trying to be as liquid as possible in the near to medium term to avoid a liquidity crunch in case credit facilities become harder to come by or costlier to obtain.

Hike surprise

When China’s central bank announced on October 19 that it would raise key rates by a quarter percentage point, it caught global markets by surprise and sent stocks, commodities and emerging-markets’ currencies lower on worries that the global economy might grow more slowly. It also accelerated the slide of the US dollar against other major currencies.

Bankers and economists are divided over how the hike will help sustain China’s long-running economic success. Some say the move may cool the country’s hot property markets while others believe it will have little direct impact on the real economy or the renminbi and actually reflects confidence in the strength of China’s economy.

The myriad of questions thrown up by the rate hike reveals how much China’s moves are being monitored across the globe. Financials markets recognize the leverage China has in shaping the global economy in the next 10 years. There are conflicting assessments: HSBC economists suggest that the move could exacerbate the property bubble in China as the higher interest rates attract more external funds into the country.

The rate hike might widen the rate differential between China and the global market, according to HSBC, and hence attract more capital inflows. But the impact would be limited by the existing capital control measures. With higher interest rates, people are likely to continue holding on to their renminbi (instead of opting for foreign-denominated assets) and this will increase liquidity chasing property assets. Cash-rich multinationals operating in China could hold off paying dividends to foreign shareholders to be able to hold on to their renminbi and have the excess cash working for them by parking it in Chinese assets that could include real estate, among others.

However, a briefing by Société Générale warns against trying too hard to divine what could happen next. If the Chinese regulators find that their move is slowing the economy more than they had originally intended, they can decide to immediately change tack. This happened before, at the height of the global financial crisis, when China reversed moves to restrict growth of loans by banks and instead pushed for measures to stimulate the economy which was faltering because of a collapse in demand from major markets such as the US and Europe.

Negative real interest rates

It seems as though the move has created more questions than answers: What exactly do the Chinese regulators seek to accomplish? How will this affect the management of foreign exchange reserves and the value of the renminbi? Will China eventually tighten its capital controls? Is China entering an extended cycle of rising interest rates?

In a report, BNP Paribas described the 25bp rise as the clearest indication yet that China has officially ended its “appropriately loose” monetary policy that had been in place since December 2008, and is continuing its exit to a prudent monetary policy for 2011. BNP Paribas says the tightening suggests a shift away from growth towards a structural quality and risk management bias, early on in the 12th Five Year Plan (covering the period from 2011 to 2015).

China’s robust tightening rather came out of the blue and is much stronger and earlier than market consensus had expected. On hindsight, the market may have paid too much attention to exchange rates and the US Federal Reserve’s quantitative easing, BNP Paribas adds. The People’s Bank of China (PBOC) hiked benchmarked one-year deposit and lending rates by 25bp to 2.50%. One-year lending rates were raised 25bp to 5.56%. “With the PBOC recently expressing confidence on the use of quantitative easing tools to manage liquidity and arguing that a greater exchange-rate flexibility would help to reduce inflation, the urgency of normalizing the extremely low nominal and real interest rates was overlooked.”

HSBC economists say that since March, China has been running negative real interest rates. While the one-year deposit rate stood at 2.25% in August, the consumer price index (CPI) had risen 3.5% year-on-year, a 22-month high. In fact, the 2010 quarterly CPI figures indicate an acceleration in the increase: from 2.2% in the first quarter, 2.9% in the second to 3.5% in the third quarter.

The rate hike does not change the fundamentals of the problem, and unless the PBOC drastically increases interest rates, depositors will continue to get negative interest rates in the coming months.

In a way, HSBC comments, the rate hike was completely justified, considering that there was growing public concern about negative interest rates, inflation and rising asset prices eating up household incomes.

HSBC sees the additional property control measures announced in late September as a sign of Beijing’s determination to rein in property prices amid a strong rebound in transaction volume. “Besides the administrative measures, interest rate is the most powerful tool to raise the borrowing costs and curb speculative and excessive housing demand.” HSBC says investment will continue to find support from over 100,000 ongoing infrastructural projects and accelerated public housing construction. It notes that consumers will gain from a boost in their interest rate income, considering that the longer-term deposits got a higher margin of rate hikes.

Speculative concerns

Robins says J.P. Morgan is intent on further expanding its operations in China, particularly with the latest regulatory developments in terms of the renminbi international trade settlement programme. However, with the currency increasingly in the spotlight as it moves towards a broader internationalization, Robins suggests that the US government should focus its efforts on issues related to market access, while at the same time encouraging China to further develop its domestic consumer base. “If there were a stronger market demand for US products, then we may start to see something of a rebalancing of trade.” She adds that most American companies in China are still operating profitably.

Robins says she is realistic about her expectations on the extent China will liberalize its capital account, possibly allowing greater flexibility in foreign money coming in. “The Chinese government is concerned about speculation. This is the reason why companies seeking working capital loans have to demonstrate where the money will ultimately be used, that it will not be used for purposes other than they were intended. Until concerns about speculative investments are addressed, the restrictions will continue.”

This article was published in the November 2010 issue of The Asset magazine
The Asset website is at http://www.theasset.com

Dark Pool Rising from the East

On November 11, Chi-East, a dark pool aimed at providing a new venue for traders to cross shares away from the public, was launched. This was no ordinary dark pool, in contrast to a slew of others that have sprouted across the region – either sponsored by broker-dealers keen to leverage their internal crossing networks or by independent outfits riding on a unique technology.

It is actually the love child of the Singapore Exchange (SGX) and Chi-X, the alternative trading platform that had shaken the European markets to the core and challenged the dominance of, what were then, powerful national exchanges by siphoning nearly a quarter of the trading volume of securities traded at the London Stock Exchange and the entire European market.

Whether Chi-East will be as successful in Asia as Chi-X has been in Europe remains to be seen, but the spread of alternative trading systems that offer a more efficient execution of trades at cheaper prices has been viewed as a mortal threat to brick-and - mortar national exchanges.

The rise of dark pools across the globe and now in the Asia-Pacific region continues to divide opinions. Critics say that by removing price-moving transactions from the spotlight, dark pools have given major market players (and especially the bulge-bracket banks) an unfair advantage over smaller players. Their proponents argue that they help stabilize market conditions by reducing information leakage when large blocks of shares come to the market.

Chi-East targets to provide sellside institutions a crossing platform for block trades of shares listed in the SGX, Hong Kong Exchanges and Clearing, Tokyo Stock Exchange and Australian Stock Exchange.

Chi-East’s kick-off happens in a climate where the regulatory mood elsewhere has grown testier with dark pools and the high-frequency traders to whom they cater.

It came just eight days after a decisive move from the US Securities and Exchange Commission (SEC) to ban naked trading where broker-dealers allow their customers unfiltered or naked access to a trading venue, whether this be a regular brick-and-mortal exchanges or an alternative trading platform such as dark pools. The move targets high-frequency traders who are blamed for the ‘flash crash’ incident in May this year that saw the Dow Jones Industrial Average lose 700 points in a matter of minutes.

Pool apprehension
The week Chi-East started operating coincided with the period when European Union (EU) lawmakers were discussing ways of imposing tougher regulations on dark pools and high-frequency share trading. Their deliberations were aimed at reshaping the EU securities laws aimed at curtailing market abuses that have been spawned by Europe’s headlong rush in the last 10 years to modernize its markets.

Dark pools and other crossing networks have been directly blamed for a sharp reduction of transparency in European stockmarkets. By allowing anonymous trading, so the lawmakers charged, the dark pools have been unfair to other market participants that have less information to price assets.

In a surreal turn in Asia, Chi-East CEO Ned Phillips described the birth of the newest dark pool in Asia as complementing the existing marketplace and as supporting a more dynamic trading environment in the region.

Two to three years ago, when the public’s fascination with dark pools was at its pitch, such sugar-coating would have been easier to swallow, but the public’s mood for dark pools and high-frequency trading has clearly changed since the May ‘flash crash’ incident.

For now, regulators in the Asia-Pacific region are still in a catch-up mode as far as dark pools and high-frequency traders go. Of course, they have much less to be worried about than their Western counterparts since electronic trading remains a very small part of trading activity in the regions. Trading restrictions remain tight hampering a host of high-frequency traders from deploying sophisticated algorithms to get in and out of markets.

Chi-East’s launch in the region follows that of Chi-X Japan’s in the middle of this year. In March, ITG launched its dark pool for Asia named POSITS Marketplace.
Other dark pools operating in the region at the moment include Bloc Sec which is owned by CLSA; DBAT which is owned by Deutsche Bank; Japan Crossing by Instinet Japan; Korea Cross which is jointly owned by Instinet and Samsung Securities; Liquidnet; and Sigma X by Goldman Sachs.

No one knows exactly how much revenue the dark pools bring to their operators. Most operators claim that their dark pools have 10% crossing rates but there are no solid statistics to back that up. Considering how liquidity dried up this year after the ‘flash crash’ in May, the average cross rates most probably went south.

Success not a given
It will be interesting to see how alternative trading systems such as Chi-East are embraced in Asia. The region is so completely different that the possibility of their success remains up in the air.

The political environment in the region means that exchanges in certain countries are partly owned by the government and shielded from the competition. The experience of Chi-East is instructive in this regard – it took a long time to get it up and running.

In an October report for consulting firm Celent, Anashuman Jaswal argues that dark pool adoptions in Asia will take longer to develop than in the US and Europe, because of regulatory restrictions and significant retail trading that will remain the key barrier for their growth in Asia. While Jaswal expects a growth in the utilization of advanced order types and trading tools (such as algorithmic trading and smart orders), he predicts that they will not flourish to the extent that they have in the US and European markets.


Chi-East is keen, however, to highlight the significant innovation it is bringing to the region with its operation. It believes it offers the first central counterparty clearing (CCP) model for selected securities. Gan Seow Ann, SGX president and Chi-East chairman, says the strategy of the new dark pool is to attract new types of market participants and cater to the changing demands of customers. Among the sellside brokers that have committed to bring their liquidity to the platform are Instinet, Deutsche Bank, Morgan Stanley, Nomura and UBS.


Zach Tuckwell, head of electronic execution and programme distribution in Asia at Morgan Stanley, is positive the platform will stimulate the flow of liquidity in the region.

Yang Xia, head of Asia-Pacific direct execution at UBS, says clients of the bank’s global equities businesses can execute trades directly on i-East. The platform, he adds, will reduce the potential for information leakage and minimizes price impact risks.

Completely Asia-focussed
Ian Lombard, the COO of Tora Trading, says dark pools have a role to play in Asia. “We are still at the beginning of the process and we will be seeing more of them in the region.” Tora itself runs a dark pool in the region called Crosspoint, which was launched in February this year. Lombard feels there is still plenty of room for more dark pools to come into Asia, adding that their number in the region is nowhere near the 40 plus pools believed to be operating in the US. In view of the specific challenges posed by the region, he is not sure what number of dark pools could operate successfully here.

“It is certain that not everybody will succeed and in fact there may well be consolidation,” he remarks, adding that it is going to be tougher for pools that rely mostly on external sources of liquidity. Dark pools can play a strong complement to the primary exchange, according to Lombard. “There are ample data in the US that illustrate that the advent of pools leads to a net increase in liquidity and this is the reason why numerous exchanges around the world are collaborating or partnering with dark pools.”

Lombard holds that dark pools should not be blamed for the purported fragmentation of markets in the US and Europe. “The fragmentation in those markets was not primarily caused by dark pools, but by the presence of other exchanges.

In the US for instance you can trade in New York and other regulated exchanges. It is the fragmentation in lit markets that has been the cause of the problems facing those markets.” It is his belief that the presence of dark pools is especially beneficial in Asia where trading spreads remain wide and transfers are desperate to cut execution costs.

In the US, those spreads have been reduced to 4 or 5bp, while in Japan they are 22bp; 24bp in Hong Kong and 37bp or 38bp in Singapore. “Through alternative exchanges, one can trade at mid-price and so save half of that spread. That is a material saving for a lot of traders in the market.”

All dark pools continue to evolve their platform, notes Lombard. “Our business model closely resembles that of dark pool provider ITG. Fully 100% of the technology driving our platform has been developed in-house. It was not something cobbled together from various product providers. We are constantly enhancing our smart order routing algorithm so that it becomes a better technology. It is about making sure that we are connected to all the venues that happen to have the volume.”

“We are completely Asia focussed, he continues. “The region now accounts for 99% of liquidity flowing into the pool.” The group which employs 175 people maintains an office in Tokyo, Hong Kong, Sydney, Singapore and a development team in Europe. He expects to launch the Hong Kong crossing platform later this year or early next year.

Briefly speaking

Swift start to Asia’s latest dark pool


Ned Phillips, the CEO of Chi-East, answers questions about the region’s newest dark pool

At what time was the platform made available to clients?
The Chi-East platform was officially launched on November 11 2010.

Did liquidity immediately flow? What is the cross rate?
Yes. We enjoyed strong support from leading brokers such as Instinet, Deutsche Bank, Morgan Stanley, Nomura and UBS. We have seen a good level of interest from clients wishing to trade on our platform. As end users become familiar with the benefits that our platform brings such as lower market impact and increased liquidity, we are confident that trading volumes will continue to increase.

How different is Chi-East from Chi-X in terms of technology and structure and what were the challenges in bringing the platform to the region?
Chi-East utilizes the same low latency, innovative trading technology as Chi-X. The main difference is in the operating structure. Chi-East is the first independent exchange-backed platform which supports the non-displayed trading of stocks across Asia in Singapore, Hong Kong, Japan and Australia on one single platform. The initial challenge is to provide an efficient clearing and settlement system across all of the markets on our platform.

What is your day-to-day role in running Chi-East?
I oversee overall business strategy and development, as well as interaction with our participants and other stakeholders.


This was published in the November 2010 issue of The Asset

The Asset website is at http://www.theasset.com

Electronic trade gains traction

This was published in the November 2010 issue of The Asset magazine

The buzz of activity in Asia’s electronic trading space is unmistakable and 2010 may yet be remembered as the year it all came together for the industry. While the US ‘flash crash’ incident in May of this year, which briefly shaved US$1 trillion off the value of US equities, hit a raw nerve among electronic trading participants and affected the level of transaction, liquidity has rebounded and most venues report a return in verve and confidence among traders.

The industry has been making great strides in building the right infrastructure despite concerns abroad about the growth of trades driven by highly sophisticated algorithms.

The leading exchanges in the region are investing in trading platforms that can cope with large volumes of electronic trades driven by algorithms and high-frequency traders. Even more compelling has been the arrival of alternative trading exchanges and dark pools into the region hoping to win business away from brick-and-mortar trading exchanges.

More hubbub was generated in November with the launch of Chi East, a dark pool where the sellside institutions can trade blocks of stocks listed on the various exchanges including the Tokyo Stock Exchange (TSE), Singapore Exchange (SGX), Hong Kong Exchange (HKEx) and the Australian Stock Exchange (ASX). Although brokers and traders admit it is still early days, the region is becoming increasingly sophisticated in the way securities (especially equities) are traded electronically.

Vast improvements in speed

All this excites Glenn Lesko. The CEO of Instinet Asia-Pacific states that electronic trading has become a major component of the liquidity that is coursing through Asian markets. He considers as quite dramatic the vast improvement in speed and efficiency in which exchanges such as the Tokyo Stock Exchange now absorb the volume of electronic trades flooding their way. Tokyo successfully put in place its Arrowhead platform this year that expanded its capability to handle all types of trades including high-frequency trades. “The exchanges are much faster this year and Singapore and Australia have embarked upon creating new platforms to enhance speed and increase capacity that will be able to better handle the scale of electronic trades swamping the region.”

Celent, a consulting firm, describes the vast changes sweeping through the region in a report on Asia-wide electronic trading published in October. The leading markets in the region, according to the report, are moving towards greater efficiency with the build-up of state-of-the art electronic trading infrastructures.

Anshuman Jaswal, the author of the report, acknowledges the progress made, particularly by stock exchanges, in using faster matching engines and cites the growth of co-location services across the region, which are becoming de rigeur among the leading brokers in the region. Brokers co-locate their servers in exchanges so that they can reduce the latency for clients during trading. Exchanges such as ASX, SGX and NSE (National Stock Exchange of India) now provide co-location services. This service is critical for high-frequency trades, which requires ultra-fast servers to send their algorithmic buy or sell orders to the exchanges.

On top of that, market data fees are being revamped in the region, while more brokers have been providing clients with direct market access and direct strategy access.

Other strong indicators of the robust growth in electronic trading in the region is the growing use of the FIX messaging protocol and the willingness of regulators in the region from Korea to Singapore and from Tokyo to Sydney to encourage the operation of alternative trading systems.

Arbitraging fuels HFT
While the report enumerates the recent gains and advances, it is quick to point out that the experience of the region differs significantly from country to country. In terms of the overall quality of infrastructure and participation from the buyside, Australia and Japan are considered the most conducive for high-frequency trading (HFT). The use of sophisticated trading algorithms has become prevalent in those two markets.

Korea has been the pioneer in the region for HFT in futures. Singapore and Hong Kong enjoy sufficient liquidity for high-frequency trades to thrive and their vibrancy as a hub for HFT is reflected in the higher level of index arbitrage between equity and futures.

Jaswal says interest in HFT in the region can only accelerate in view of the rise in the cross-listing of exchange indices across Asia and the possibility of exploiting arbitrage opportunities. He sees evidence of a Nikkei arbitrage between the Osaka Stock Exchange and SGX and a Nifty arbitrage between NSE and SGX and expects other arbitrage opportunities to come up in the region. He notes that a number of hedge funds undertake arbitrage between the US market and respective Asian markets for ADRs in Singapore and predicts HFT volumes could rise in the region.

Mike Gilbert, global head of professional trading group (PTG) and the Asia-Pacific head of sales for clearing and PTG at Newedge, a futures and options broker, says the last ten years have been an exciting time for electronic trading in the region, especially in view of the birth of HFT.

“It is growing exponentially and we are definitely going to see more activity,” he says, “the industry will continue to evolve, including the role of clearing houses, and we expect volumes to climb over time.” He suggested, though, that clearing exchanges and brokers in the region should take a closer look at the risks and benefits involved. “There is often a misconception about the role of electronic trading and stakeholders need to be aware of the enormous benefits, including reduced trading costs and increased liquidity.”

Before joining Newedge in 2004, Gilbert worked with an independent trading software vendor and prior to that he traded equity options for eight years in London.

Electronic business volume to double
The speed of change sweeping through the region’s electronic landscape has prompted Lesko to predict that Instinet, which has always operated as an online broker, may double its penetration of the region in five years or less. “It is quite feasible [especially] in countries where we have a physical presence on the back of the region’s improving infrastructure for electronic trading. Instinet now basically covers much of the region and where it does not, it works through a local broker-partner. The reality is that we are covering everything across markets, except Chinese A-shares which must be accessed by brokers onshore in China.”

Instinet, which is owned by Nomura, has been operating in the region for 20 years. It started in Hong Kong, established itself in Japan and gained an onshore presence in Singapore four years ago and in Australia last year. The group has a number of liquidity pool offerings. The largest ones are Japan Crossing, which includes a VWAP (Volume Weighted Average Price) cross, and CBX (Continuous Block Cross) in Hong Kong and Japan, both of which are pools where traders can opt whether or not to display their orders. There is a VWAP cross too in Korea. Through those pools, Instinet manages US$85 million to US$100 million of internal liquidity, Lesko points out. Instinet estimates its VWAP cross ratio is around 10%.

The roll-out of more alternative trading systems into the region is happening despite the controversy that their use has spawned in the US and European markets. In late July, Chi-X Global’s roll-out of proprietary trading system Chi-X Japan was followed in November by the roll-out of Chi East, a pan-Asian dark pool joint venture with the Singapore Exchange. Chi-X Australia is due to launch in the first quarter of 2011.

More brokers have launched internal crossing and dark pool aggregation services across the region. Everyone is looking at China, but the country remains one of the few markets where HFT remains limited since Chinese regulations restrict the activity.

Cut-throat competition
While Lesko is happy about the growth of the volume for electronic broking, he faces growing competition. Pricing has turned even more cut-throat for online broking because bulge-bracket firms such as Goldman Sachs, Morgan Stanley, Barclays Capital and even its parent company Nomura are spending a lot of money building their electronic trading platforms competing with Instinet’s. “They try to differentiate themselves from each other, but with so many new platforms being marketed at once that drives lower prices.”

Lesko believes that one cannot truly differentiate between the various technologies that are provided. HFT is a tiny part of the total trading volume. “HFT is extremely low-margin business and many brokers almost make nothing out of it but they do it since they get to provide their clients with a full suite of services, including financing and prime brokerage.”

But Instinet does not currently operate a prime-broking or financing facility and only focusses on equity trade execution. This is the reason, according to Lesko, why most of the business is the plain-vanilla type of mutual funds or trusts, pension funds or long/short hedge funds.

Here comes high frequency trading

It could be years before we get to hear cloak-and-dagger stories of intrepid traders based in Tokyo or Hong Kong stealing powerful proprietary algorithmic trading techniques from their banks to make their tainted billions before they are caught.

But by the looks of it, high frequency trading is taking an unprecedented leap in Asia, the buzz around it spreading like wildfire, especially in recent months.

Industry conferences on high frequency trades have become money-makers for conference organizers – and a dime a dozen are happening this year across the region, from Mumbai to Tokyo, from Hong Kong to Jakarta.

Regional exchanges such as those in Singapore, Taiwan, and India have announced ambitions plans to invest in systems (especially in co-locating data centres) to cope with the unique demands of high-speed trading while bulge-bracket investment banks and securities houses have been rolling out highly evolved algo products and smart order routing systems to help clients access vast pools of liquidity across different asset classes.

The launch of Tokyo Stock Exchange’s Arrowhead trading platform in January this year too, with better capability to handle high-frequency trades, has injected a considerable degree of excitement among investment banks and their large institutional and hedge fund clients in the US.

It used to be different. For decades, the region has viewed with strong suspicion high-speed, high-frequency trading, which is also referred to as automated or programmed trading. The large stock market crash of 1987, for instance, was blamed mostly on programmed trading since they exacerbated the panic that swept through America’s financial heartland. In 2009, high-frequency trades stirred debate in the US on worries that Goldman Sachs’s proprietary algorithms were giving it undue advantage over other traders.

In May, highly evolved algorithms used by high-frequency traders were blamed for the sudden nosedive in US shares that has mystified even the most eagle-eyed regulators.

Hand in hand

Two years ago, recalls Zach Tuckwell, head of Asia electronic trading at Morgan Stanley, electronic trading hardly made up 10% of their client’s trading activity in Asia. Now it is about 20%, and likely to reach 30% in a year-and-a-half. “It’s been a phenomenal jump every year and I believe our client business in Asia will soon see its level of electronic trading activity approach what we have in Europe – which is around 40-45%.”

Tuckwell says Morgan Stanley’s main clients include institutional funds and large hedge funds and a fair proportion is based in the US and is starting to get a wider exposure in the region.


Shalabi: Happy to notch up small gains on a day-to-day basis
Hani Shalabi, head of Advanced Execution Services (AES®) for the Asia-Pacific at Credit Suisse, says several factors have helped push high-frequency trading activity in Asia in recent years. The most decisive was the market crash in 2008. Shalabi argues that the collapse of equity prices and the uncertainty that followed in the early part of 2009 forced numerous asset managers to seriously consider alternative strategies to diversify returns.

“Most of those who managed to show some positive P&L during the meltdown were high-frequency traders employing more systematic strategies. They made money regardless of whether the market went up or down since their trades were uncorrelated with market direction and mainly took advantage of volatility to generate returns.” The more volatile the markets, the robuster the returns generated by high-frequency traders – with a lot of them surpassing the returns achieved by the more established fund managers. By adopting the right investment strategy and employing high-speed trading to realize that strategy, they generally gained positive returns.

Does this mean that technology has usurped investment savvy? Hardly, says Shalabi, both go hand in hand in achieving market success. “Technology is a powerful enabler, but you still need to have a winning strategy to make money.”

Tokyo undergoes major changes

Tuckwell of Morgan Stanley credits the sweeping changes sweeping through Japanese trading infrastructure as another factor injecting excitement to electronic trading in the region. In early July, Chi-X Japan finally obtained a proprietary trading system (PTS) licence from the Japan Financial Services Agency (FSA) and is expected to trade on the Japanese equities platform by July 29.

Six months earlier, the TSE had established its Arrowhead platform, which has whetted the appetite of American institutions for algorithmic trading in Japan, according to Tuckwell, since it allows TSE to better handle high-frequency trades. The platform handles cash products such as stocks and convertible bonds and has declared its goal of achieving order response period of less than 10 milliseconds (ms) – the time a honey bee needs for two wing flaps – combined with high reliability.

Neil McGovern, director of marketing at Sybase, a data management firm , noted in his blog last year that TSE has been facing the same data pressures as the exchanges in North America and Europe in view of the rapidly growing number of orders per day, smaller share/trade figures and a downward trend in the execution rate. With Arrowhead, TSE will ensure that it remains competitive, he argued, especially against a PTS such as Chi-X.

A Singapore Exchange (SGX) spokes­person says high-frequency trades now contribute about 25% to 30% of the exchange’s daily derivatives trading volume, which is more than double the level two years ago. In the securities market, however, their share has yet to grow to a more significant proportion, which is one of the reasons, she explains, the exchange is rolling out its S$250 million (US$182 million) Reach initiative.

“Over a seven-year period, Reach will create the world’s fastest trading engine, a world-class data centre offering co-location facilities, and over the next 12 to 18 months, we expect to establish international communication hubs at major financial centres such as Chicago, New York, London and Tokyo,” she enthuses. “These hubs will facilitate the connection of customers from those locations to our trading facilities here in Singapore and enhance the distribution of SGX’s various investment products there.”

The hubs, the spokesperson clarifies, are not the same as the co-location offering in Singapore. SGX will offer co-location services only in Singapore, at SGX’s new data centre located in Keppel Digihub from early 2011 and will provide co-location customers with ultra-low latency access to the engines. The SGX derivatives trading engine has an order response time which is on par, if not better, than TSE’s Arrowhead, claims the spokesperson, adding that SGX Reach has been benchmarked at an order response time of 90 µs “door to door”, which is over 50 times faster than Arrow-head. [A microsecond (µs) is equal to one millionth of a second.] “With Reach in place, SGX will advance to the top of the pack among exchanges.”

HAL 9000

Opportunities and challenges indeed abound, but is the Asia-Pacific region ready for the automated trading revolution that swept through American and European markets in decades past? Who will be the winners and losers in this race of which the ultimate logic could see humans being completely removed from the trading equation, in a bid to deliver the most efficient and error-free trades.

For Luddites and technophobes, the whole trend heralds a most disturbing trend, which is the unstoppable advent of an age where machines take over, with individuals or human decisions in the future completely excised from involvement in trading, all the decisions to buy and sell securities or any form of assets being made by the algorithms themselves.

While men still design and formulate the algorithm, it is not hard to see the machines themselves eventually designing their own unique algorithms thus completely shutting off humans from the process, making trading completely non-human.

If that is not enough to trigger existentialist fear, think of the myriads of small stock brokers in the region struggling to survive from shrinking margins and once again they already see the threat of re-marginalization from sizeable investment houses that are able to invest in systems that allow them to thrive in this environment.

The proliferation of alternative trading system thriving through automated trades has already created a ripple of fear among stocks exchanges. They worry it could mean the end their long-entrench­ed monopoly on the trading of shares in their respective countries.

There is one large factor, however, that stands in the way of a massive adoption of automated trading in the region: the considerable fragmentation of markets in the region with their own unique trading rules and circumstances.

Then there is the fear that electronic trading could be planting the seed for a true market apocalypse. The unrelenting logic of some algorithms could lead to massive losses or spectacular windfalls if massive sell-orders are triggered in a downturn. This teetering between chaos and complete perdition is evident in how some high-frequency trading firms behave.

In May, the Dow Jones Industrial Average plunged over 900 points in a single session. In the early part of the slide, when the index was tracking a 500-point loss, many traders stopped trading altogether, a decision which – some analysts believe – added to the gravity of the market sell-off that day.

Reports says Tradebot Systems, a large high-frequency trading firm based in Kansas City, Missouri, closed down its computer trading systems when the Dow Jones Industrial Average had dropped about 500 points while Tradeworx, a New Jersey firm that operates a high-frequency fund, also stopped trading during the market turmoil, according to a person familiar with the firm.

Singapore leads the way

While electronic trading has taken off in Japan, it has yet to really make its impact on other Asian markets including that of Australia Hong Kong and Singapore, although the exchanges in these markets are considered to be some of the more efficient, boasting low latency – which means trades are executed in a fast and efficient manner.

Traders says the volumes in the region remain relatively small for high-frequency trading considering that there are not that many stocks in the region where daily trade volume reaches above US$10 million everyday. Then there are certain regulations, specifically the rigid tic rules (adopted by a host of exchanges after the 1997-1998 Asian financial crisis) that hamper numerous algorithmic trades from being executed.


Mittal: We are building from the ground up
The degree of willingness or unwillingness of the exchanges to open their platform to alternative venues that provide faster and less costly execution is crucial says Punit Mittal, the head of electronic trading at Daiwa Capital Markets. He says this is the reason why initiatives taken by SGX, the Singapore exchange, last year to work with alternative trading platform Chi-X is considered one of the more significant steps being taken to revolutionize electronic trading in the region. The joint venture is called Chi-East.

In August last year SGX signed a heads of terms agreement with Chi-X to launch the first exchange-backed dark pool in the Asia-Pacific region. The non-displayed trading platform 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.

The industry, according to Mittal, has been surprised at the momentum at which the SGX and ChiX partnership has been evolving. “From Day One, the SGX has been thinking in really strategic terms how it can leverage the tie-up with Chi-X. Now they are building hubs around the region that will start operating only a year from now.”

The partnership is moving towards providing a common data centre and co-location facility for SGX and Chi-X providing clients with the ability to trade on multiple-venues from the same co-location site, Mittal explains. No other exchange is currently doing that in the regionl. “While Chi-X has been allowed to operate in Japan as well, its arrangements with Tokyo Stock Exchange do not even come close to what it has worked out with SGX since their data centres remain separate and so in essence they are not really working together in Tokyo.”

Shalabi of Credit Suisse says the region was a couple of years behind the US with algorithmic trading. This kicked off in the US in 2000 and reached Asia in 2003. Smart Order Routing (SOR) began in the Asia-Pacific with Credit Suisse’s introduction of Path­finder – its own SOR system – in Japan in April 2009. Before the rise of alternative venues in Japan, no Asian markets had the multiple trading venues to make SOR necessary.

The entry of new players plus the willingness of bulge-bracket investment banks to invest in new systems, the surprisingly proactive engagement of exchanges to upgrade their systems as well as the growing interest among local institutions for such service have fuelled the spread of electronic and high-frequency trading in Asia.

Algorithmic trading or automated trading, involves the use of computer programs which decide how orders are executed in the market. It will decide on timing, price, or quantity of the order, or will initiate the order, usually without human intervention. Algorithmic trading heavily relies on real-time data and this has prompted considerable investment among ex­changes to establish additional data centres that can make information available to the market not in ms but in µs.

This “co-location” shaves crucial ms from the time it takes to complete a trade. Traders located at a far distant from an exchange do often face a delay of at least one ms whenever they seek to trade a price via their computer screen. The more serious investors – particularly large hedge funds in the US – cannot afford prices that flash that late. The blink of a human eye takes 300 to 400 ms. A fair number of traders now operate in the smaller realm of µs.

Being faster than rivals to the best price – that is, achieving the lowest “latency” – has thus become a key goal for a lot of markets. This explains why the Taiwan Stock Exchange is establishing a data centre rental and co-location service to meet the needs of offshore and domestic traders. The service gives broker-dealers the opportunity to rent and install their servers in the exchange’s data centre, allowing them to improve the efficiency of their trading network and reduce the repair and operating costs of maintaining their own data centres.

The service will serve additional functions, such as providing more back-up options for broker-dealers. The move, which has been given the go-ahead by the regulator, has stirred a hubbub of activity in the exchange as it prepares to roll out the new rental service of its data centre by late this year. Taiwanese officials say all the arrangements are expected to be completed by September 2010, with the co-location service to be launched in the fourth quarter of the year.

High-frequency trading is considered a special class of algorithmic trading where trades are initiated by computers based on information they have received electronically. The algorithm takes extremely short positions on the shares being traded. The computers process the information before human traders are able to do so.

Bigger may be better

The advent of high-speed trading in Asia can only serve to reconfigure the whole brokerage business in the region. What repercussions it will have for small brokerage firms remain to be seen, since it introduces another differentiating dimension into the services and capabilities offered. Shalabi believes that not everyone will be able to afford the cost of the technology involved in high-frequency trading.

“Brokers tend to concentrate on their core strength and among small brokers, technology has never been a core strength. They might offer some unique boutique features or have effective insights into specific markets that allow them to trade those markets really well. For them though, technology is an expensive proposition and it makes more sense to rent this technology from a large broker which has the economies of scale to make that kind of investment.”

Only global brokerage houses are truly capable of building advanced technologies such as SOR, internal crossing networks and ultra-low latency DMA infrastructure critical for high-frequency traders, thinks Shalabi. “What will happen if the small brokers need to offer some of those features which they cannot afford to build? They will probably have to rent it. Most of these brokers don’t have a seat on all Asian exchanges and so they need to go through a large broker to access these markets. As a bonus, they get access to SOR, crossing networks, advanced algorithms and high-speed execution.”

The large investment banks seem to think that the time has come for algorithmic-driven trading to achieve the scale at which it had achieved in the US and Europe. In June this year, Morgan Stanley rolled Algorithm Manager into Asia, which it describes as a new tool providing traders with dynamic control over the execution strategy of individual orders. The bank says the launch is part of the global expansion of its customizable electronic trading platform.

The bank says the Algorithm Manager allows traders to automatically switch an order between several different Morgan Stanley Electronic Trading (MSET) algorithms depending on market conditions, time or quantity executed.

Bespoke algo

Tuckwell says that as the marketplace in Asia becomes more electronic, it is more important than ever that his clients are “armed with the most sophisticated and flexible tools available to react to various factors and changes in market conditions.” Electronic trading has particularly been a major focus for Morgan Stanley in Asia in the last 18 months, he adds.

“We have been investing heavily in systems and people, developers and programmers and a qualitative team,” he continues. “Senior management has realized that this is an important part of our equity offering in the region. Many of our Asia-based clients have seen the benefits of algorithmic trading from their European and US colleagues.”

How will the suite of algorithms fare in some of the inefficient markets of the region? Tuckwell holds that there will be markets with low latency where algorithmic trades very well, but that it is not so much latency and rather functionality where Morgan Stanley’s proprietary algorithm proves to be of value to investors. What the Algorithm Manager does electronically, Tuckwell notes, is to mimic human trading behaviour at the press of the button.

Algorithm Manager allows a trader to trade in the same way day after day. The offering allows investors to, in Tuckwell’s words, “design his strategy in the way he wants to trade.” Rather than offering the clients a bewildering number of algorithm techniques, what Morgan Stanley has done is streamline their number and incorporate more functionality into each algo so that the traders can design its use for their particularly needs.

The provision of direct market access to clients has become a focus of attention for a slew of securities firms as well. In the same week Morgan Stanley rolled out its new algorithmic platform in the region, rival Credit Suisse announced that it can now offer clients trading Hong Kong listed equities direct market access speeds of under one millisecond via AES® Velocity.

The bank boasts that AES® Velocity has achieved latency figures of 600 µs in Hong Kong. By comparison, it says, the typical human reaction speed is around 150 ms, or 250 times slower. AES® Velocity has been available in Japan since January 2010 providing clients with the fastest speed in the market. Credit Suisse says AES® Velocity will soon be available in Australia and Singapore.

There is still debate whether high-frequency traders exacerbate volatility in the market. Shalabi of Credit Suisse argues there is no solid proof that this is the case. What high-frequency trading provides, he argues, is abundant liquidity. “When they are acting on both sides – buying as well as selling – they create pressure on both sides and so minimize any sharp movements in share prices.”

While the fall in US markets after the so-called “Flash Crash” in May 2010 was exacerbated by the pullout of market makers it does not necessarily mean that they were the root cause of the fall. “The US market is so liquid that people trust that an order sent at market with no limit price will be executed at current levels. It’s only when that liquidity disappears, that you realize how dangerous market orders can be.”

Shalabi says best execution entails the best price at the time of execution and access to all available liquidity. The latter means considerable investment in smart order routing and internal crossing engines as well as providing faster and smarter algorithms. This is something that every broker has to do, but we have been doing it better and for longer than the rest. “We will definitely keep investing in systems and technology to help clients.

Shalabi is not shy in claiming that Credit Suisse stands out as among the best providers of electronic trading in the street. “We started earlier than everyone else with electronic trading. Back in 2000, we were already laying the foundations, while other players did not start until 2004 and 2005. We have won a multitude of awards for electronic trading and that is for a reason – we have the most advanced electronic trading platform and the widest breadth of products.”

Shalabi admits that volume handled in the second quarter this year shrank considerably. “People are more cautious and there is a lack of conviction about price direction. This has translated into some very low volume days during June.”

High-frequency traders need time to let earnings accumulate
Not just another job

The job of a high-frequency traders isn’t easy at all. While they may be relying on algorithms and lightning-speed execution, they have to keep innovating to maintain returns and fend off competition. And returns are steady rather than spectacular. “High-frequency trading profits are consistent but generally not remarkable on any given day – it’s a case of numerous small wins rather than home runs,” says Hani Shalabi at Credit Suisse.

High-frequency traders generate profits steadily. “Most are quite careful and are happy to notch up small gains on a day-to-day basis. Their earnings accumulate.” Shalabi explains that following the significant volatility the market went through early this year, hedge funds in the region wanted to employ different strategies to achieve diversified returns.

The uncertain investing environment since 2009 has made it imperative for people to explore new ways of making money in the market, according to Shalabi. “There was less interest before 2008 because there was less incentive: the great bull market was delivering outstanding returns to long investors almost regardless.”

Shalabi notes that generating pure alpha in the US in recent years has grown tougher and more challenging. “Most of the institutions engaged in high-frequency trading are usually US-based and they are now looking at ways to make money in Asian markets where the competition has yet to percolate. Japan is the first Asian country where they have been significantly active.”

Hedged index arbs

Shalabi says that high-frequency traders use different parameters than traditional investors when weighing opportunities. “The factors that apply to other investors do not apply to these guys. What they are most attracted to is liquidity, easy of borrow, low cost and flexible regulations.” Depending on their strategy, these factors determine the number of markets they can trade in. “What they have found so far is the best combination of factors have appeared in Japan and Australia. Both jurisdictions offer cheap execution, deep borrow and good liquidity in a diverse number of names.”

Korea, Hong Kong and Taiwan are considered middle tier because most factors are really good, except they are expensive in terms of fees. While Singapore is reasonably cheap, it is still considered illiquid compared to the other markets mentioned. “It has liquid index futures so some index arb players do trade there since it is not as expensive as Hong Kong.” China’s cash equities markets is the largest but remains mostly inaccessible due to quota limitations while liquidity remains a thorny issue in markets such as Thailand, Indonesia, Malaysia. “Those countries hardly have any stocks that trade at least US$10 million a day which is a ballpark level that high-frequency traders look for to call a stock ‘liquid’.”

Korea’s strength is in the futures and option markets, which are among the most sizeable and most liquid in the world, while futures trading rather than cash equities has taken off in a major way in India because of the difficulty of selling shares until they are settled two and half days later.

Shalabi says the various high-frequency traders in the market each have their own unique strategies. Traditional market-makers adopt the most predictable tack putting out buy and sell offers on stocks whose spread sizes outweigh the cost. Statistical arbitrage traders analyze a wide variety of factors and look for signals that statistically return more positive than negative results over time.

Index arb traders buy and sell index baskets and hedge through index futures, depending on whether the basket is cheap or expensive. In general, Shalabi notes most of the players are almost always fully hedged by the end of the day either with the exact opposite number of futures or by drawing their positions down to zero. “They actively buy and sell but close out their positions at the end of the trading day so that they are not subject to any overnight risk. During the day when they perform any market action they immediately, or in a very short timeframe, engage in an opposite action that locks in a small margin of profit.

Building automation from the ground up
Blank canvass

Daiwa Capital Markets is a relatively new entrant in the automated trading arena but it has great ambitions in Asia. Punit Mittal, its global head of electronic trading, says they will not make the mistakes made by some Western investment banks that have struggled to make their automated trading platform relevant in the region.

Punit Mittal knows exactly where he and his group stand at the moment. The global head of electronic trading at Daiwa Capital Markets describes his group’s initiative in building its automated trading business to be almost similar to that of building and creating on a blank canvass. “We’re building from the ground up, with no legacy structures to wrestle with.”

He does not consider this to be a major hurdle or short-coming, arguing that they have successfully leap-frogged the barriers in establishing the business thanks to the new wave of technology and breakthroughs that have swept through the automated trading landscape in the last few years. “The technology has changed dramatically in the last few years. There is new hardware and new software that was not available two or three years ago. We are using those products to build a much more stable system.”

He laughs off claims by Western global investment banks that they are way ahead in automated trading in the region, saying that in the last couple of years, several of them have struggled to make their business sufficiently relevant to generate enough fees and revenues. Asia, he adds, is a market completely different from what they are used to in the US and Europe.

“Several global investment banks have been investing massively in Asia in terms of high-frequency trading, but a fair proportion now realizes that the reason why the strategy is not working is that the conditions prevailing in the region are so different from those in the US and Europe. Their systems won’t work because of the different ways markets are accessed. The risk filters are different. Much else is different.”

Mittal explains that numerous banks spending large sums of money in the last two years building their electronic and automated trading capabilities in the region soon find that what they have been offering was not the best product in the market “because after all the patching which they have applied, it was simply not the right one for the market”.

Justified expansion

Daiwa Capital, he insists, is not making those mistakes. “We just started our expansion strategy. We have a blank canvass. We can build something from the ground up.”

Mittal notes that some of the trading arrangements they have with Hong Kong and Singapore clients were completed at a much faster rate in terms of time to market and have turned out to be more competitive than those of US rivals. That explains why Daiwa Capital has been attracting a lot of attention from some of the large hedge funds operating in the market, he proudly points out. Post-Lehman, a host of major Western investments houses have experienced a significant consolidation of their operation in the region, he explains, with some deciding instead to mostly focus on their main markets in the US and Europe.

“For Daiwa, Asia and Japan are our core markets and we are not going away. We don’t want to focus globally but we want to focus on Asia and all our investments are being spent to focus solely on expanding our operations in the region.” But they are not expanding simply for the sake of expanding.

While it has, for instance, built a powerful crossing engine in Japan, the group has no plans to roll out in other parts of the world in the near future, adding that any deployment has to be justified in terms of Daiwa bringing the most relevant technology and liquidity to other markets.

Mittal admits, however, that his group has been holding discussions with a large retail broker in Hong Kong about the possibility of a tie-up that would allow them to roll out their Japanese crossing engine in the business enclave.

Mittal says Daiwa’s key strength and attraction for a majority of hedge funds and institutional traders is that it was the first Japanese brokerage house to aggregate flows across retailing and institutional clients. “No other house has been able to bring Japanese retail flow and institutional flows together and that has been an interesting proposition for lots of our institutional clients.”

Enhancing liquidity management

Daiwa Capital Markets launched its electronic trading platform in Asia for cash and listed derivatives in December and became fully operational in January this year. It offers institutional clients globally the ability to trade in Australia, Hong Kong, Korea, Singapore, India and Taiwan through a suite of advanced electronic trading tools including algorithmic trading, crossing engine, direct market access (DMA) trading and smart order router (SOR).

Mittal says Daiwa has committed significant resources to building a first-class electronic trading platform and plans to hire an additional dozen professionals in Japan and Hong Kong to serve clients across the region. “The demand for electronic trading strategies has increased dramatically in the last few years as more buyside clients have opted for the unbundling of research and execution to achieve better efficiency and lower transaction costs,” said Mittal.

After the launch of Daiwa Algorithmic Trading this year, Daiwa rolled out the next generation crossing platform and SOR with the ability to sweep liquidity across all available execution venues in early 2010. “Helping clients enhance liquidity management is a key focus for Daiwa, considering that 89% of total equity trading cost can be attributed to indirect costs such as market impact costs, and opportunity costs due to information leakage, says Mittal.

Daiwa has already launched a low-latency DMA platform using the co-location facility provided by the Tokyo Stock Exchange (TSE) after Arrow­head, TSE’s next generation trading system, went live in January 2010.

The Fast DMA will be used mainly by high-frequency traders who trade actively through computer-generated arbitrage models. “Daiwa is committed to becoming a full service investment bank in order to tap into the growing Asian markets,” states Mittal. “To that end, we are expanding across all divisions including investment banking, electronic trading, equity financing and derivatives to service global institutional clients.”

Daiwa has announced its plan to invest 100 billion yen in its operations in Asia ex Japan and to increase headcount in the region by more than 400. The bank is already a leader in equity trading, Daiwa’s addition of an electronic trading platform is one of a number of planned initiatives designed to expand its service offerings to meet the evolving needs of institutional clients.