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.
We call this broad range of tools Trading Analytics, and this article looks at some common Asia liquidity events to show practical examples of how Trading Analytics can provide data that answers real questions, helping traders take advantage of liquidity while minimizing costs.
TRADING AROUND THE OPEN AND CLOSE
More buyside traders are now involved in investment meetings, acting as advisors in the discussion of how to get the most alpha for a given investment decision. Using Trading Analytics to form an opinion in advance of the trade on how to structure its timing can have a significant effect on the alpha outcome. Understanding intra-day volume profiles and the corresponding volatility can be critical to finding liquidity that comes from trading at the times when others also are. The chart below shows average profiles of how much is traded in different Asia Pacific markets in the first and last 30 mins of the day (including auctions).One common theme is that traders often avoid the more volatile early trading period for fear of price movements, preferring to hold their trading back to the more stable sessions through the day. However, doing this too much, particularly in markets such as Taiwan and Japan where high volumes are done during early trading, can push overall costs higher and increase risk. Missing out on significant early liquidity requires the trader to execute more later in the day where they may need to cross the spread more, and increases the risk of non-completion of an order – often overnight
volatility is higher than that seen during early trading sessions. It also increases risk of over-participation in the Close which may push a stock price, a topic that Asian regulators are particularly sensitive to.
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 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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