The rise of the Asian superbroker

Steve Grob is group strategy director at Fidessa

As the global banks grapple with tides of regulation, fines, and a myriad of other post-crisis issues, local Asian institutions are tooling up and stepping in to fill the gaps, writes Steve Grob, director of group strategy at Fidessa.

Global banks have had a tough time in the past five years. Soaring capital adequacy ratios and ballooning compliance costs have forced them to look carefully at their business models and cost bases. Asia in particular is proving to be challenging ground, with as many different regulatory regimes as there are countries in this huge and hugely diverse region. Add the need to be ‘local’ in every market and it can be a stretch too far.

This has created a very fertile ground for local banks and brokers. Big deals have already been done – CIMB and RBS, RHB and OSK, Maybank and Kim Eng – and ASEAN banks generally are increasing their investment in their services for international clients wanting access to markets from Singapore and Hong Kong to Mongolia and Myanmar. Indeed some are reaching out past the Asian border – CITIC acquired CLSA and now has a license to trade in the US as a broker-dealer. Could these Davids of the broking world really be starting to snap at the heels of the Goliaths?

It all began in the chaos of the crash. At first the gaps left by the global banks began to be filled by tier two brokers. Even local shops setting up for the first time enjoyed a bit of a party, grabbing market share as the global guys turned their attention inward – but could it last?

The short answer was no. While the immediate winners enjoyed short-term gains, global clients expected the same level of service they enjoyed at home in Europe and the US, and Asian providers initially struggled to provide the super-regional front-to-back office professionalism expected. Fast forward five years, however, and the game is changing fast.

Right now, South-East Asian firms are taking significant bites out of the regional pie. Banks like Maybank, CIMB and DBS have built out, in some cases, very significant teams to service global clients hunting alpha in Asia. Chinese brokers are among the winners too, providing experience and seamless access to the A-Share market by offering pipelines to China through multiple quotas, including via the forthcoming Shanghai-Hong Kong Connect link.

So what gives these guys the edge? And what will keep them at the head of the pack?

Firstly, a proven local presence – proven success at home is the foundation stone. Wherever home is – Singapore, Hong Kong, Kuala Lumpur or further afield – a track record there is the first step to international success. On top of a strong local presence in one (or more) specific market(s), those with superbroker aspirations need to offer seamless access to other markets in the region. But that’s not enough. Seamless access to the mothership in Europe or the US is absolutely critical to win international business. Asia may be the world’s growth engine, but decision makers in global investment houses are still sitting far away – in New York, London, Boston, Edinburgh or the Caymans – and so a proven linkage ‘home’ is essential.

As well as having links to all the places international clients may want to trade, sell-side institutions must also demonstrate that they have the regulatory and compliance robustness required by gun-shy global clients. Battered by wave upon wave of local and global regulation, international clients are looking for service providers who can make Asia painless. Extraterritorial regulations like Basel III and Dodd-Frank, along with the continuing fallout from 2008-9, have created a kind of regulatory turf war which is particularly challenging for would-be pan-Asian investors. Institutions are under pressure from regulations within and without, as well as specific local market pressures and the requirements of local industry associations.

Many looking at Asia from the outside see a fairly homogenous view of regulation, but the reality is quite different. Asia is more akin to all 52 US states designing and implementing their own versions of RegNMS, or all 28 EU member states making up their own rules to meet the transparency and other objectives of MiFID II.

Asian regulation also includes special elements that global customers may not be familiar with, like sharia products in Indonesia; excluded investment products in Singapore; and local vs foreign shares in Thailand. In Korea and India, compliance and regulation is a grey area at best – left for the most part to the auditor’s interpretation, particularly when it comes to client information and the visibility of the order book.

The goal of local banks wanting to play on the pan-Asian stage is to neutralise this complexity whilst still demonstrating a gold standard in compliance. Simply throwing people at the problem won’t work anymore. Not only does this approach suffer from diminishing marginal returns it can actually make things worse. This is because more people just muddies the audit trail and gets in the way of the real-time transparency regulators are starting to insist upon. The answer lies in simplifying and automating compliance through workflow technology.

Consistency is key when it comes to servicing global institutions. Brokers need to smooth out the many inconsistencies of local markets to provide a single consistent trading experience for both their own traders and their customers, whether they’re trading shares, ETFs, bonds, futures, options, commodities or exotics like sharia-compliant products and Indian P-Notes.

The ability to shift order flow nimbly between markets and time zones is also a must-have ability for any broker, especially those vying for pan-Asian dominance. Only this way can the broker interact intelligently with markets and provide a coherent view of what is going on back to their clients. Intelligent workflow is the only way to connect all the different pieces together in a way that appears effortless to the client.

Holes in the pan-Asian trading fabric have to be filled for incoming money to be effectively allocated. New customers coming in to the region will expect high-touch, DMA, algos and synthetic order types and these have to be simulated where they don’t exist. They’ll also expect facilitation to help them reach their trading goals, and this will sometimes mean taking orders on to the internal book.

Post-trade is often forgotten, but is critical to proving a broker’s true pan-Asian credentials. Any delay in the processing of confirmations means that buy-sides in the US or UK, when they arrive at their desks in the morning, won’t know what has been traded in Asia during the night. That in turn will delay their own start of day processes. Ensuring confirmations are sent out 15-30 minutes at the most after market close is what makes a truly global offering a reality. Again, however, people and double keying aren’t the answer and usually only get in the way. The only real alternative is proper, exception-based management workflow. Not only is it quicker and more accurate but, implemented in the right way, it can be cheaper too.

Delays or errors in post-trade are more than just an inconvenience to the end client, however. Sub-standard post-trade processing opens up a huge area of risk too when trades float around in the twilight zone of not being fully confirmed by either counterparty. The regulators have recognised this and so are paying just as much attention to transparency in post-trade as they are to what’s happening on the trading floor.

The post-trade world is also moving away from its old proprietary standards towards open standards like FIX which a number of buy-sides have adopted for confirmation processing and insist that their brokers follow suit too.

Ultimately, choosing the right technology will mean the difference between success and failure for would-be Asian superbrokers. Using the same highly resilient, robust workflow technology in use by their global competitors, from the OMS to the back office, will give local banks the core capabilities they need to service sophisticated global clients. On top of this, local brokers have unique insights and relationships that are incredibly valuable to those from outside and can save their partners huge amounts of time and money. So, once they have the right tools in place, they can leverage these as a very compelling competitive advantage.

Assuming they get it right – and many already are – how high can the superbrokers fly? Will they begin to encroach on the US and Europe? It would be foolish to underestimate the incumbent rulers of these markets, who will no doubt push back vigorously if they begin to see their lunch being eaten by new competitors. These broking Goliaths have vast internal resources and many decades of experience in keeping themselves competitive and so pushback should be expected. Almost in anticipation of this, however, we are seeing some of the Davids step ahead of this and band together as CIMB, MBSB and RHB have proposed to do.

Meanwhile, Asia has a dynamic market structure with different trading venues seeking to win the pan-Asian Game of Thrones and become the dominant regional exchange. Who will win this war? Hong Kong? Australia, Singapore, Japan perhaps? Or will a new, unexpected leader suddenly emerge? Whoever does, brokers on that home turf will find themselves with a big competitive advantage over their superbroker competition.

The winners in this epic global game are yet to be determined. The incumbent global brokers are well aware of the moves by their Asian counterparts. Maybe we will see the big continue to get bigger, and smaller competitors simply find their own niches to exploit. But anyone who ignores the growing Asian superbroker phenomenon does so at their peril.

Markets will remain complex but rewarding across Asia for the foreseeable future. Those who are prepared to invest in building their superbusinesses properly will do well, no matter where it is they call home.