ConvergEx targets “dark” Asia Pacific capital markets

Algorithmic and dark trading is growing in Asia Pacific markets

Western investment firms looking to trade in Asia Pacific should should use dedicated algorithms built from the ground up rather than rely on algos ported from the US or Europe, according to William Capuzzi, president of trading technology company ConvergEx’s global execution business.

Since the financial crisis many global asset managers and investment firms have been increasingly looking to Asia to find trading opportunities as tighter regulation and depressed macroeconomic conditions have weighed in closer to home. The Eurozone debt crisis, contrasted with stronger Asian macroeconomic growth, has contributed to this pattern. However, with a less developed trading infrastructure available to investors, buy-side firms have been keen to explore solutions that can minimise the effect of typically higher spreads and lower liquidity levels in the region.

“We see a large buy-side move of assets into markets such as Korea, Malaysia and Indonesia,” said Capuzzi. “But historically there have been few algos and no real dark trading in those markets. Algos meant for the US are no good – where you have stocks that may record zero trading volume for periods of 20 or even 30 minutes, and then trade a huge proportion of their ADV in a single go, you need dedicated algos if you want to avoid strong adverse impact on your portfolio returns.”

Earlier this month, ConvergEx adapted its Asia Pacific execution tools so that its algorithms now connect to four new dark and two new lit trading venues in Hong Kong, Australia and Japan. The move was accompanied by the firm’s launch of its trading algorithms in Malaysia, Indonesia and Korea. The algos cover reserve, scaling and pegging strategies and draw on specialised analysis of Asia Pacific market fill rates, capitalization levels and spreads.

The ConvergEx algorithms are called Darkest, Grey and Abraxas. Darkest is an aggressive specialist dark pool algo that is the firm’s first to focus outside the US and is focused on quality of execution; Abraxas is a customisable liquidity seeking algo that targets non-displayed liquidity as well as lit liquidity. Finally, Grey is a passive order type targeted primarily towards trading small and mid-cap stocks. Grey interacts with both the lit and dark markets while ensuring the user never crosses the spread. According to Jason Rand, head of electronic and portfolio trading for Europe and Asia at ConvergEx, these algo types should help western investors target Asia Pacific markets such as Indonesia, where spreads can be as high as 80 basis points, by enabling them to cross at the mid-point and thereby save half the spread.

“We are seeing demand for more complicated strategies as low volumes contribute to Asia Pacific volatility and spreads,” he said. “There’s good liquidity in the dark in developed markets like Hong Kong, Australia, Singapore and Japan, and alternative trading platforms such as BCNs and PTSs are gaining traction, but it’s hard for the buy-side to access that today and we wanted to help make it easier.”

Other firms have also set out plans to expand their Asian presence in recent months. In November, technology provider RTS revealed that it would centre its business on growth opportunities in the region by opening a new data centre in Shanghai, its first office in China, and a new data centre in Tokyo, as well as the transfer of its chief executive to Singapore to oversee the region. Earlier the same month, NYSE Technologies added co-location facilities in Singapore to enable Asian and European investors to access each other’s markets more easily, via its SFTI trading network.

Despite the relative appeal of Asia Pacific to western investors, the region has not been immune to the effects of the global financial crisis. Pan-Asian trading volumes have fallen from $1.6 trillion in December 2009 to $1.3 trillion in December 2012, according to figures provided by Thomson Reuters. Volumes in Europe and North America have also experienced similar declines over the same period.