In March 2014, Greenwich Associates estimated that 57% of FX market participants in Asia were using electronic systems. Some 18 months later, a survey of Asian FX trading organizations commissioned by Thomson Reuters found that 70% were already using electronic platforms and that 8% were considering using them over the next 18 months. An additional 12% were looking at shifting business to electronic platforms over a slightly longer timeframe.
This increase in electronification has made it easier for Asian investors to connect and access FX liquidity pools, resulting in tighter spreads, lower costs and deeper liquidity as well as enabling smaller players (such as start-up hedge funds and even retail investors) to trade at a very low cost, says Arin Ray, an analyst with Celent's securities and investments practice.
Just under two-thirds (62.4%) of those surveyed by Thomson Reuters reckoned these trends would persist and that electronic and algorithmic trading would cause spreads to tighten further.
Ray says: “Electronification has also resulted in banks developing portals for their clients, which helps other areas such as communication between banks and clients, aggregate viewing of positions, risk management and transparency.”
In April, the Monetary Authority of Singapore announced that it had given regulatory approval to R5. The electronic venue’s CEO, Jon Vollemaere, observes that while eFX in Asia has increased liquidity in major currencies, emerging-market currencies have largely remained unchanged.
“Different countries have different levels of eFX trading,” he says. “India and South Korea are highly electronic, but Indonesia, the Philippines and Malaysia are far less so while China is somewhere in the middle. There has been volume growth in some of these currencies, but that is due more to economics and changes in policy than electronic adoption.”
Three-quarters of respondents to the Thomson Reuters survey believed that more buy-side market participants would start to use auto-execution or algorithmic trading as part of their FX strategies by early 2017 and almost half believed that this would directly result in greater transparency.
According to Michael Go, head of market development, Asia-Pacific, at Thomson Reuters, there is a strong indication that electronic platforms and tools will enable organizations to manage and respond to the growing number of trading risks on a real-time basis. He says: “An example would be the use of analytics hedging and risk management of positions, allowing them to remain within the boundaries of regulation, but also to successfully and profitably transact.”
Simon Winn, head of sales, Asia Pacific, at EBS BrokerTec, notes that in addition to deciding whether to build in-house, white label or outsource to a third party vendor, considerations around where to source liquidity within a proprietary aggregator can also be crucial. This is because without sufficient market data inputs the price distributed to clients can be off market and severely disrupt profitability.
So will Asia follow a similar development path to Europe? Richard Anthony, managing director, FX erisk and esales, at HSBC, suggests that although Asia has seen more focus on building relationships than the cost of execution in the past, the future roadmap will be similar to Europe's.
He says: “At the forefront of discussions now is interest in execution algorithms, pre- and post-trade execution cost analysis and market liquidity data as well as a strong understanding of the source of client flow and the way in which the market maker manages it.”
As the big European firms have already moved to an electronic FX backbone, this will encourage their Asian counterparts to move away from bilateral to single and multi-dealer platforms, says Go.
“FSB member jurisdictions in Asia are putting in place trade-reporting requirements for a number of asset classes, including FX,” Go says. “Hong Kong has put reporting measures in place for certain derivative FX and interest rate products, while Japan, India, Indonesia, Korea and Singapore have trade-reporting requirements in place for all transactions in both asset classes. The concept or expectation of best execution impacting FX in Asia has also been a driver to electronic markets and platforms including algorithmic trading.”
Vollemaere says FX traders in Asia are frustrated with a lack of transparency and periods of limited liquidity and see electronification as the solution, but acknowledge that simply plugging a G10 platform into the Asian markets isn’t the answer. “It is also apparent that China will go down its own path, not necessarily following the ISDA/CLS route,” he says. “It is much more likely that China will develop the CFETS/CIPS/CHIX path and have the world come to them.”