Alternative trading systems: Crossing comes to Korea


Peter Koh
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In April, Instinet added Korea to the growing list of markets where it operates alternative trading systems.

KoreaCross, as the system is known, will operate as a daily blackbox pre-market crossing network, matching orders at the volume-weighted average price. Instinet launched the platform with the support of Samsung Securities, a leading Korean investment bank, which is acting as a local broker sponsor, providing clearing and settlement services as well as order flow.

KoreaCross is Instinet’s ninth alternative trading system worldwide and the third in Asia after JapanCross, a crossing network for Japanese equities and CBX Japan, a real-time matching engine.

Although still behind the US and Europe in terms of the volume being executed electronically, traders in Asia are catching up rapidly, a trend being driven by the growing influence of hedge funds in the region.

According to Greenwich Associates, hedge funds accounted for almost 40% of commissions in Asia in 2007, almost double their 22% contribution in 2006, and up from just 5% as recently as 2005. The formidable hedge fund presence is driving up trading volumes and increasing the demand for low-cost alternative execution venues.

Investment banks are also an important contributor. Consultancy Celent estimates that at some global brokerages in Hong Kong up to 40% of buy-side clients’ trading might be placed electronically. Algorithmic trading, while still under 15% of buy-side trading in the region, is as high as 60% of internal trading at some big brokerages.

Although most of the growth is coming from the activities of US and European institutions in the region, there is a growing number of sophisticated funds in markets such as Singapore, Hong Kong and Australia.

Regulatory changes in the region are also encouraging, helping to increase adoption rates.

"Asia has been about three to four years behind the US and Europe in terms of electronic trading adoption but is rapidly narrowing the gap," says John Fildes, managing director at Instinet. "Part of the reason is that non-Asian clients are increasingly looking to trade in the region with the electronic tools that they are accustomed to using in the US and Europe but a perhaps equally important factor is the regulatory changes taking place in a number of Asian markets. Malaysia, for example, is currently testing a full DMA infrastructure, as opposed to a "one-touch" DMA model, and Sebi, the Indian regulator, has also just announced that it will permit DMA trading. These kind of changes are going to open up the markets in Asia further."