From the fledgling, and hot, Chinese market to the recently reinvigorated markets of Southeast Asia to the mature markets of Japan and Australia, both trading and the quality of trade execution have become even more important to institutional investors in how they value their brokerage relationships.
“Execution is of growing importance as a way of getting paid,” says Sung June Hwang, a Hong Kongbased managing director at Credit Suisse First Boston who heads the firm’s non-Japan Asian cash equities division. “Clients will still pay a lot for research, but we are no longer in a world where we get paid just for research.”
With trading’s importance growing in Asia, Institutional Investor set out to determine which firms are providing the best trade-execution service to their clients. To do so, we surveyed head buy-side traders at scores of money management firms around the world. With 133 firms responding, CSFB takes top honors in our first ranking of Asian trading firms, followed by Deutsche Bank, J.P. Morgan Securities, CLSA Asia-Pacific Markets and UBS.
These brokerages’ efforts to emphasize and improve the quality of their trade-execution services are part of a worldwide phenomenon driven by cost-consciousness from the buy side as well as by regulatory initiatives. Best-execution rules in the U.K. promulgated by the Financial Services Authority — which require institutions to seek best prices while including venue, timing and total cost-of-trade considerations in their calculations, and mandating that each firm devise an actual best-execution strategy — have placed new burdens on British institutions. Firms operating in the U.S., meanwhile, are also under closer regulatory scrutiny. With the biggest equities marketplaces setting the pace, pressure for higher-quality trades has increased worldwide. Meeting the demand for quality often means investing in systems that can handle and report trades faster, more efficiently and at lower cost. Nicholas Andrews, managing director and head of Asia-Pacific equities for J.P. Morgan Asia-Pacific in Hong Kong says that his “biggest investment spend in Asia is on our technology platform.”
No wonder the top-tier brokerages are racing to provide the best electronic trading platforms. Deutsche Bank is building capacity for electronic order-routing, direct market access and indications of interest, or IOIs. With more investors seeking executions that minimize market impact, Hong Kongbased Daniel Miller, who heads Deutsche’s Asia ex-Japan sales-trading effort, says that providing clients with electronic IOIs for crossing “has become essential,” and that the number of orders on his book from institutions seeking other institutional trading partners has increased significantly.
In developed markets like Tokyo, more investors are seeking direct market access, or DMA, which permits buy-side traders to access liquidity pools directly, without intervention from a brokerage’s trading desk. Michael Alexander, global head of sales trading at CLSA Asia-Pacific in Hong Kong, believes that DMA usage in Japan will soon approach that in the U.S. Investors in markets like those in China, India, Indonesia, Malaysia, the Philippines and Thailand have less need for direct access, Alexander says, because those markets are smaller and less liquid and trades require brokerage assistance.
For all the interest, the use of electronic trading is still nascent. The II survey finds that only about one third of investors use DMA services in Asia. Moreover, approximately eight in ten respondents said that electronic trading systems accounted for just 5 percent or less of their total equity trades, although they also said that that percentage is likely to increase next year.
Asian brokerages are finding that quality trading combined with actionable research is important to a growing customer segment: hedge funds, which, says J.P. Morgan’s Andrews, have become “a very significant minority” in the Asian markets, accounting for a growing proportion of commissions. Hedge funds are also helping investment banks raise capital for companies across Asia, says John Jacobson, who heads Asian equity sales and sales-trading for UBS. He notes that a number of hedge funds are opening offices in Hong Kong and Singapore — which is likely to add to Asian trading activity.
For brokerages, markets in China, Hong Kong, India, South Korea and Taiwan traditionally have been the big commission generators, and that pattern is likely to continue, says CSFB’s Hwang. But he expects more business to come from Indonesia, Malaysia, the Philippines, Singapore and Thailand, countries where recent political and economic reforms, as well as rising company earnings and improved corporate governance, have created more-welcoming climates for investment. In Malaysia, five foreign brokerages — CLSA, CSFB, Macquarie Bank, J.P. Morgan and UBS — were granted licenses in March to set up their own offices and conduct institutional trading rather than go through local brokerage firms.
As evidence of this shift, trading volumes have been increasing throughout the region. The trend is most noticeable in Indonesia, where in May volumes reached $5.7 billion, more than double the $2.1 billion recorded a year earlier. In Malaysia, monthly trading volumes have been improving since early 2003, when totals hovered between $1.5 billion and $2 billion; they are now in the $3 billion range. Singapore also has seen significant increases: Monthly volumes ranged from $6 billion to more than $9 billion over the 12 months through May, up from $3 billion to $4 billion in early 2003.
Fortunately for the sell side, pricing pressure on the commission front thus far has been muted. More than half of the investors surveyed said their transaction fees were about the same this year as last, and most expected prices to stay about the same next year, although an increasing percentage of respondents expected lower prices. Overall, though, says CSFB’s Hwang, the drive to pay less “is not nearly as bad” in Asia as it is in the U.S. and Europe.
The rankings were compiled by II staff under the direction of Director of Research Operations Group Sathya Rajavelu, Assistant Managing Editor for Research Evan Cooper, Assistant Managing Editor for Technology and Development Lewis Knox and Senior Editor Jane B. Kenney with Associate Editor Svetlana Anoschenko.
