Asian exchanges will see high trading volumes of 20 to 30 per cent growth per annum, driven mainly by economic fundamentals but also by greater order flow from foreign traders and overseas quantitative funds, according to a report by Celent.
However, while undergoing change the Asian landscape still has a real need for improvement.
Market participants that expect the Asia Pacific equities markets to resemble the US and European market structure in the next few years are likely to be disappointed, says Celent.
Ultimately, firms that can customise to the local markets and have sufficient capital and patience to wait out evolutionary trends will see potential upside in Asia Pacific opportunities, the report says.
Asia Pacific equities market structure and trading developments are still three to five years behind the maturity of the US trading landscape, as well as several years behind post-Mifid Europe.
Unlike the US and European markets, where Regulation NMS and Mifid spurred innovation and fragmentation, however, there is no uniform catalyst to spur regulatory change in the Asian equities markets.
Country-specific factors like regulatory restrictions on investor IDs, stamp tax and multiple currencies, and significant retail trading act as market structure barriers and limit the penetration of advanced trading, including high frequency trading, into individual markets.
For 2010-2012, Celent foresees a period of limited disruption for Asia Pacific in terms of new venues and matching systems, resulting in relatively low fragmentation.
According to the report, The Evolution of Equities Market Structure in Asia Pacific, off-exchange crossing volumes should grow to 4.7 per cent of total regional trading volumes in 2012, up from 1.1 per cent in 2009.
"Increases in buy side trading sophistication will gradually support advanced trading strategies, including some HFT," says Neil Katkov, senior vice president of Celent’s Asia research group and co-author of the report. "Greater utilization of advanced order types and trading tools like algorithms and smart order routing will expand in the region, but certainly not to the extent of US and European markets."
"The transfer of advanced trading technology to brokerages and increased rates of buy side adoption of electronic trading and trading tools like algorithms, smart order routing, direct market access, and trading analytics mean that Asian markets will be transformed to favour firms who are ahead of the curve in adopting leading-edge technology," adds David Easthope, research sirector for Celent’s capital markets group and co-author of the report.