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Automated trading revolution sweeps into Asia

A Filipino trader walks in front of an electronic board during trading at the Philippine Stock Exchange at the financial district of Makati, south of Manila, Philippines, on Tuesday, Aug. 7, 2007.


Tracing a 7,800 kilometre route from Japan past the Philippines and across to Singapore and Malaysia, a new underwater cable costing $430-million (U.S.) opened for business this week aimed at automated traders.

The "Asia Submarine-cable Express" will loop up to Hong Kong in a month's time, shaving three milliseconds off the speeds offered by existing cables and providing the shortest link between the Tokyo and Singapore bourses.

The project – backed by Japan's NTT DoCoMo Inc., Telekom Malaysia Berhad, Singapore's StarHub Ltd. and Philippine Long Distance Telephone Company – is a sign that the automated trading revolution that swept the United States and Europe is lapping Asia's shores.

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Asset managers and brokers trading Asian equities want faster access to exchanges and market data. High-speed fibre optic cables that transmit electronic messages containing data are a key component of delivering that.

In Japan and Australia, exchanges face competition from rivals, such as Chi-X, the operator of trading platforms in Europe and Canada. That is fragmenting trading across different venues, requiring traders to adopt electronic tools – such as algorithms – to seek the best price.

Algorithms can be divided into "execution" algorithms typically used by asset managers to buy or sell shares according to preset parameters such as maximum or minimum price, and more sophisticated but more controversial "trading" algorithms used by high-frequency traders to sniff out trades in the blink of an eye.

Algorithms generally have created a crisis of confidence in the U.S. equity market structure after a glitch at an algorithm used by Knight, a large U.S. broker, nearly caused the firm's collapse. Yet experts say Asia has a chance to avoid the West's problems.

"Asia-Pacific has effectively got a 'third mover advantage' in learning from other regions and implementing reasonable practices to balance the evolution in electronic trading behaviour with overall market integrity," says Michael Corcoran, Hong Kong-based head of sales and trading at ITG, a U.S. broker.

Derek McCole, head of equity dealing for Asia at Aberdeen Asset Management, says algorithmic trading strategies are useful in Asia because the region's stock markets are less liquid than those in the U.S. and Europe.

However, he adds that, for the same reason, the consequences of selecting the wrong algorithm "could be a bit more serious."

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Some watchdogs in the region are already acting. The Australian Securities & Investments Commission this month unveiled sweeping plans to clamp down on "aberrant" automated share trading, including requiring traders to have controls on their systems and test them annually.

Last month, Hong Kong's Securities and Futures Commission issued a proposal requiring that algos be tested at least annually.

"We have a breathing space to get it right," Ashley Alder, SFC chief executive, told a recent conference. "The genie is not yet out of the bottle."

Yet there are also natural barriers to the adoption of algorithms in Asia, meaning there is unlikely to be runaway growth – regardless of what regulators do.

While trading algorithms are common in cash equities in Australia and Japan, they are rarely used in Singapore and Hong Kong, where relatively high stamp duty and exchange fees deters such trading. In South Korea, algorithms are widely used in the futures markets but not in cash equities. Exchanges in India even require algorithms to be approved before they can be used.

"People from outside the region tend to talk about Asia as a homogenous unit but there's no such thing," says Chris Price of AsiaEx Consulting in Singapore. "It's 15 different markets with different technologies, cost structures, regulations and cultures. That's a natural barrier to algorithmic trading."

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In China, there are signs of a cautious approach, even when it comes to the more basic "execution" algorithms.

In addition, most share markets in the region have a greater proportion of retail, or individual, investors than in the U.S. and Europe, which will act as a further constraint.

Jessica Morrison, head of market structure for Asia-Pacific at Deutsche Bank, says: "Given the higher levels of retail participants in the Asian markets, it is unlikely that it's going to dominate in the way that it does in the U.S. and Europe."

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