In early September, the first leg of an ambitious project to unite the economies of Southeast Asia through the capital markets finally fell into place. The exchanges of Singapore and Malaysia began trading on the ASEAN link, allowing members of both exchanges to trade each other’s markets freely and interchangeably for the first time. 

The opening of the link was about far more than a link between two stock exchanges. For years, the Association of Southeast Asian Nations – whose members include Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam – has been searching for a way to promote its goals of regional peace and stability, accelerated economic growth, improved infrastructure, technological advancement and mutual benefit.

In April 2011, when the official project timeline was announced, the six ASEAN members signed up to the trading link project boasted a combined GDP of £1.1 trillion, with 3,600 companies listed with a collective market capitalisation of £1.2 trillion. The ASEAN exchanges also plan to create an index of the top 180 ASEAN stocks, exchange-traded funds, real-estate funds and natural resource-based funds. Already, the FTSE ASEAN 40 Index provides an easily-digestible window into the region for foreign investors.

For Andrew Freyre-Sanders, head of equity execution services at Malaysian bank CIMB Group, the ASEAN project represents a real opportunity to capitalise on liquidity growth as the world wakes up to the rising possibilities for connectivity and trading a large swathe of Asia through a single infrastructure.

“ASEAN has marketed itself well as an asset class,” he says. “In the past, the ASEAN countries were sometimes seen as too small for international investors to trouble with. But when you look at the growing IPO pipeline, the GDP growth and population expansion, taken together they make an interesting investment story.”

Moreover, the rise of ASEAN trading infrastructure reflects the longer-term rise of Asia. In 2009, Asia’s equities exchanges traded more than Europe for the first time in history (£11.3 trillion and £799 billion, respectively). Times are changing, and investors tired of the Eurozone debt crisis and uninspiring opportunities in the US economy are increasingly turning to Asia, where many markets are booming. The European Union achieved just 1.6% growth in 2011 according to the CIA World Factbook. Indonesia, the best-performing ASEAN economy, reported 6.5% economic growth over the same period.

Bursa Malaysia and the Singapore Exchange are the first two members to be connected to the ASEAN trading link. The link will be extended to Thailand in October, with the other members including two Vietnamese exchanges and those of Indonesia and the Philippines to follow later. 

Competing kingdoms

The expansion of trading opportunities in the ASEAN region goes far beyond the official link, which is being built by financial technology provider SunGard. Across Asia Pacific, more and more brokers are setting up internal crossing networks, which automatically match their own internal flow with that of clients. In addition, several large independent institutional trading platforms are spreading their reach across Asia.

In August, agency broker and technology provider ITG launched its POSIT dark pool in Indonesia. POSIT is made up of two parts: the POSIT Alert block crossing platform and POSIT Marketplace, which aggregates flows from 20 dark pools across Asia Pacific. The advantage of dark platforms such as POST Marketplace is that they generally match buy and sell orders at the mid-point. Since spreads in Asia can be relatively wide – between 50 and 150 basis points in Indonesia alone, according to Clare Rowsell, head of client relationship management and marketing, Asia Pacific at ITG – they offer institutional investors the prospect of substantial cost savings from not having to cross the entire spread on their transactions. ITG claims that POSIT Marketplace is providing average price improvement of 11 basis points on trading in Asia Pacific.

“We are seeing ongoing increases in dark trading, across the different markets in the region,” says Rowsell. “There are more broker crossing networks being built, interest from the buy-side continues to increase, and the percentage of trading in the dark is going up. The growth in Asian dark trading on our platform from H2 last year to H1 this year has been more than 50%.”

ITG is not the only dark platform operator to have set its sights on building an Asian empire. In early September, Liquidnet, the institutional block trading venue, launched its own dark pool in the Philippines. The latest addition was the ninth Asia Pacific market to be connected to Liquidnet, and was chosen partly for its economic growth – the country saw GDP growth of 6.4% in Q1 – and partly because of government plans to seek £9.8 billion of foreign investment in the nation’s economy. 

“The developing Asian markets have seen a lot more growth than the developed markets in Europe, and that creates opportunities,” says Rowsell. “Investment in Asia is up since the financial crisis, and firms that have suffered in the west are now looking for opportunities further east. Both equity trading and listings businesses have seen notable growth in recent years.”

However, not every play for regional domination by the would-be kings of Asian equity trading has been a success. Chi-East, a joint venture between the Singapore Exchange and Chi-X Global, a provider of alternative trading platforms, met its untimely demise in May when its investors pulled the plug, forcing the venue to close down.

Built during a period of expansion and success – Chi-X also rolled out new platforms in Japan and Australia – the Chi-East project suffered its first serious setback at launch, when a dispute with the Australian Securities Exchange over market data ended with the venue unable to launch in the country.

The venture pushed ahead, but was hit by regulatory impediments such as minimum order size thresholds in Singapore and other restrictions in Hong Kong. The difficulty was exacerbated by the reluctance of brokers to connect to a third venue following the launch of Chi-X platforms in Australia and Japan. A prolonged period of generally low equity turnovers across the region, which in turn nullified the expected gains from the venue’s clearing arrangements with LCH.Clearnet, may have provided the final nail in its coffin.

While the fall of Chi-East was lamented by some buy-side observers, who praised its model and expressed hopes of a revival at some point in the future, the story stands as a warning that not every Asian trading infrastructure project is destined to success. So how can the ASEAN link avoid a similar fate? 

Building for posterity

According to Philippe Carré, global head of connectivity at financial technology provider SunGard, which is building and operating the ASEAN link infrastructure, the answer lies in building a strong domestic base that can attract international investors and provide a valid counterweight to the much larger neighbouring markets in China and India.

“A lot of the smaller ASEAN countries struggle to be noticed on their own,” he said. “They have joined together to fight back from under the shadow of China. If the link is successful, demand for expansion will be high. Other ASEAN markets will want to join, and other asset classes will be introduced. Maybe one day there will be an ASEAN clearing house. Then they’ll go for a common rulebook. ASEAN is the first step. It’s not just a trading link – there are many possibilities.”

In the first stage of the ASEAN link, the exchanges want their members to trade on each other’s markets – for Singapore market participants to trade on Bursa Malaysia, and vice-versa. Once enough market participants are trading on the link, the idea is to connect it up to the SunGard Global Network. SunGard will then be the bridge between the ASEAN link, and the rest of the world. However, the ASEAN exchanges retain control over if and when this happens, says Carré – SunGard’s role is as a willing technology provider, not a party to complex ASEAN exchange group decisions. 

Some observers do see in the project the prospect of a pan-Asian trading community to rival Europe. Others are more sceptical about its prospects, partly because of the length of time it has taken to establish the initial linkages – the link has been in the works since the twelfth ASEAN summit in 2007. But there is general agreement that the project will likely be beneficial for domestic liquidity levels.

“While this is not new for the global buy-side, who can already access multiple markets in Asia Pacific via their brokers, it is great news for domestic market participants to be able to access each other at low cost,” says Rowsell at ITG. “ASEAN aims to attract international investors to the region. If we see product innovation, such as cross-listing of stocks, that will drive up interest in ASEAN markets.”

For Denis Sweeney, representative director for trading solutions and market data provider Interactive Data in Japan, the key to success is to take a long-term view. While ASEAN is unlikely to result in drastic changes in the liquidity profile of ASEAN markets overnight, over time he estimates that the region’s equity markets can and will become significantly stronger as part of a united trading infrastructure.

“The total liquidity of the ASEAN nations would probably put them just inside the top twenty markets worldwide, so it makes a lot of sense from their perspective both to promote liquidity internally and to attract international liquidity into their marketplace,” he says. “Currently some of the exchange infrastructure is a bit old, but as that improves, interest will increase.” 

The lure of the Orient

If the ASEAN link stands to make many of Asia’s smaller markets more attractive in the long-term, there are also changes afoot in some of the bigger markets that surround it. While China gradually continues the internationalisation of its currency the renminbi, and the expansion of its qualified foreign institutional investor scheme, Hong Kong is reforming its trading rules and improving its technology in anticipation of further changes to market structure.

“Asia is a huge growth opportunity,” says Rob Lane, European business manager, trading solutions at Interactive Data. “It has multi-asset appeal – we set up in Tokyo for the FX market there, not the equities exchange. We’re setting up a data centre in Hong Kong for low-latency co-location next year, and we are also partnering with the Austrailian Securities Exchange to give US clients access to ASX, from Chicago, later this month.”

The new Interactive Data service in Chicago exists primarily to serve latency-sensitive traders, particularly the high-frequency trading community. The firms can access market information in Chicago at high-speed; often US investors will use such links to acquaint themselves with a particular overseas market before co-locating themselves there if sufficient opportunities are present. 

Beyond China, other nations are also facing market structure changes that could mean more business opportunities for international investors. In Korea, home of the world-famous KOSPI 200 index futures and options, which boast such stratospheric levels of liquidity that they have been described by America’s CME Group as a “cultural phenomenon”, the government is planning to open up the country’s markets to alternative exchanges like those seen in Japan and Australia.

Although the barriers to entry for international firms looking to set up a trading venue in Korea are currently still relatively high, due to a strict regulatory structure and foreign ownership limits, Sweeney expects that could change at any time. Already, the CME Group has a partnership with the Korea Exchange to offer trading of KOSPI 200 futures after Korean hours through the CME Globex trading platform.

Meanwhile, dark liquidity is likely to continue to increase in the medium-term, as ITG plans to continue expanding its own POSIT dark pool to Asian markets through the rest of the year.

Viewing the Asia Pacific region as a whole, some observers suggest that the evolution of Asian markets towards a more normalised trading infrastructure, where investors can trade the region in one step rather than having to establish expensive exchange memberships in several small markets at once, represents the perfect outcome for international financial institutions in the longer-term. 

“Currency and settlement are not normalised across Asia,” says Freyre-Sanders at CIMB Group. “The ideal for investors is to be able to trade it in one go. In Europe, the Eurozone made that aspect simpler. But as ASEAN starts to normalise the trading infrastructure, liquidity will grow. Beyond that, the expansion of dark block crossing networks like ITG and Liquidnet is already helping to normalise broker crossing in Asia Pacific, especially in terms of reporting. Streamlining helps investors to access exciting opportunities in Asia’s markets. It’s the evolution of the market. This is just the beginning.”