Ofir Gefen, Head of Electronic Brokerage at ITG Asia Pacific, looks at how opportunistically taking blocks of liquidity rather than sticking with volume-based trading habits can improve trading performance.
The term ‘TCA’ has now become so common across the industry, and some would argue commoditized, that its value is in danger of becoming misunderstood. While most buyside firms use some form of broker post-trade analysis to measure how they’ve performed against their benchmark, the firms who are out-performing versus their peers are using a broader approach of pre-trade, real time and post-trade analytics to answer questions about how and why trading costs are incurred, and what actions can be taken to reduce them.
In Asia's equity markets, liquidity flat-lined through the fourth quarter of 2013 according to ITG's Asia Pacific 'Liquidity Barometer'. This tool is a measure that combines turnover, spreads and volatility that was launched in 2008 with a notional value of 1,000.
In the last quarter of 2012, the liquidity barometer had started to trend upwards, as the Japanese market got into gear for a period of high activity, culminating in a record month of May 2013 with a reading of 1208. When Japan flows are good, they significantly affect the Liquidity Barometer as well as business in general around the region. That is because the next two biggest markets in the region, Hong Kong and South Korea, jointly account for less than Japan on its own.However, following this bumper second quarter, the later part of the year demonstrated a drop, and the Liquidity Barometer finished the year at 1011, and at levels not dissimilar to the end of the previous year. The fourth quarter in Asia is cyclically quiet, a trait in common with the rest of the world, as the buy-side locks in annual profits. From October 2013, liquidity declined slightly across Asia, with the Liquidity Barometer falling from 1055 to 1010 and staying at around that level for the rest of the year. Transactions costs hover at normal levels Costs in Asia’s main markets rose during October to approximately 42 basis points, from an average of 35 basis points in September, before falling back to 38 basis points by the end of the year. With a long term average of 41 basis points, current costs are hovering around those levels. Australia volumes for the year were lower at approximately A$3 billion per day but transaction costs have stayed stable in the mid-thirties
Hong Kong transaction costs are fluctuating, and the continued move downward in the fourth quarter to 36 basis points (from 50 basis points at the beginning of 2013) is probably due to locking-in of profits and trading in large cap names.
Japan costs were fairly stable in the lower 40s. Singapore witnessed lower transaction costs than normal at 39bp from 51bp. That was also probably due
to a bias towards large cap trading which serves to bring the overall average cost down.
Korea stayed faithful to its long term average of 50 basis points (the 28 basis points number in the third quarter for South Korea was an abnormality).
In Asia’s equity markets,liquidity took a nosedivethrough the third quarter of2013 according to ITG’sAsia Pacific ‘LiquidityBarometer’. This tool is a measure that combines turnover, spreads and volatility that was launched in 2008 with a notional value of 1,000.
The unbundling of research and trading has been a discussion topic for many years both globally and in Asia. While in theory there are many good reasons to unbundle, the practical implications have often made it difficult for asset managers to do so. However now several important business factors are pushing Asia-based fund managers to review their processes and consider how they value research and trading, while using more sophisticated tools to manage and report on who and what they pay.
In Asia’s equity markets, liquidity continued to rise through the second quarter of 2013. This is a measure that combines turnover, spreads and volatility launched in 2008 with a notional value of 1,000. 2013 therefore has bucked the trend of 2011 and 2012, in which a strong performance for this liquidity indicator during the first quarter was not sustained into the second quarter.
In Asian equity markets, liquidity rose throughout the first quarter of 2013. ITG’s Asia Pacific Liquidity Indicator stood at 1,143 at the end of March, a rise from 1,110 in February. The trend was consistent across all Asian markets, but was particularly notable in Japan and Australia with the principal catalyst most likely the increased turnover in developed Asian markets during the quarter. ITG’s Indicator is a measure that combines turnover, spreads and volatility. It was launched in 2008 with a notional value of 1,000.
Starting May 26th the Australian regulator (ASIC) had new market integrity rules (MIR) relating to pre-trade transparency exceptions coming into affect. Rule 4.2.1 of ASIC MIR (Competition in Exchange Markets) was revised to introduce tiered thresholds for block trading (also known as “Block Specials” or just “Specials”), while also introducing meaningful price improvement exception to pre-trade transparency (replacing the “at or within the spread” exception) under rule 4.2.3.
Concerns about dark pools have come to a head and alternative markets in Asia Pacific are among those under scrutiny. This week’s edition of The Blotter explores this topic with a focus on the Australian market.
Asia Pacific liquidity fell through Q2, dragged down by bearish sentiment through the global equity markets and a general lack of investment momentum. The quarter finished with one of the lowest liquidity indicator readings of the past few years – this is only the second time since March 2009 and the midst of the global financial crisis that the liquidity indicator has dropped below 950.
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