Is Your Outsourced Trading Provider Global?
The Benefits of Having a Local Presence in the Asia-Pacific Region
For asset management firms based outside the APAC region, trading APAC markets is a challenging mosaic of regulatory, operational, and tactical matters. In such an environment, entrusting asian orders to brokers overnight and expecting the best execution outcomes has been proven to be inconsistent at best.
Building and staffing an in-house off-hours trading desk or an entire regional office has historically been the solution, but the associated costs are often prohibitively high. As a result, many firms have chosen to engage with an outsourced trading provider to optimize performance.
Due to the fragmented and competitive nature of trading in Asia, firms must take extra care to ensure goodness-of-fit with an outsourced trading provider. It would be beneficial to ask the following questions while assessing your outsourced trading provider: Is the provider truly positioned to succeed in the challenging Asian markets? Will the provider be a trustworthy partner and experienced guide in complicated conditions?
In our experience, successful trading in Asia demands three core capabilities: (1) Careful management of order flow; (2) Deep, localized knowledge and (3) Well-established relationships. Here we explore several characteristics of Asian markets and illustrate how these core capabilities build a foundation for success.
Less liquidity for block trades
Sourcing liquidity presents different challenges in Asia than in the US and Europe. In Asia, most names are less liquid, and many countries lack dark pools – making block trades particularly challenging.
On-the-ground experience is essential when navigating difficult liquidity landscapes. Firms engaging with outsourced trading providers should ensure their assigned traders are well versed in the idiosyncrasies of each country where securities are being actively traded, including facilitation risk options and regulations. Equally important, are close relationships with sell-side connections and local brokers for both color and liquidity. Traders with deep relationships will benefit from timely updates on blocks as well as impactful news and flows – an advantage that carries significant value.
Additionally, traders must pay special consideration to information sharing, judiciously choosing how much information is shared and with whom. While certain block desks are consistent performers, there is always risk of leakage, which can be very impactful in most Asian markets.
More volatility driven by governance and event risk
Careful management and trading of order flow is important in all markets – but even more so in Asia, where governance and event risk can be significantly more common and corrosive, driving intraday price swings that often dwarf those seen in the US and Europe. As such, the trust required to handle order flow in the most appropriate manner is higher in Asia than developed markets. If a trader simply inputs orders into an algorithm with little care or attention, the results in Asia are likely to be sub-optimal.
Diverse market structures and regulations
Given that Asia lacks a single regulatory framework – in the way MiFIDII provides structure in Europe, for example – traders are faced with a diverse array of market structure dynamics. Without the operational expertise, ever-changing regulations can prove to be complicated.
When confronting this challenge, local knowledge and relationships are of the utmost importance. To ensure timely notification of regulatory changes and potential impacts, firms should identify a trading partner who is entrenched in the local markets and connected with the street and various levels of people within relevant organizations. A broker who may be insufficiently familiar with market structures and regulations can create a range of problems, including issues with entry and exit of positions and trade settlement.
Greater retail participation
Retail participation is generally much higher in Asia than developed markets. The Chinese equity market, for example, is largely dominated by retail investors: More than 70% of turnover originates from retail participants, relative to approximately 15% to 20% in the US.
In markets with size-able retail participation, news reported in the local language can impact markets before it reaches primary information streams, such as Bloomberg and Reuters. This is particularly true in China, Hong Kong, Japan, and South Korea. Additionally, local blogs and news sharing apps can generate huge retail interest, as does the morning hard-copy news in China.
This dynamic creates additional opportunities and risks for offshore institutional investors. Given the profound impact retail trading can have on short-term price momentum in Asian markets – for both single names and indexes – traders must be able to provide real-time explanations and interpretations of themes which have captured the attention of a given retail audience. Such capabilities stem from deep, localized knowledge and a broad network of relationships.
Improve your APAC trading with Meraki Global Advisors
The Meraki team has the expertise and access required to trade every asset class worldwide, including all markets in Asia. Our senior leaders draw on extensive experience in the region:
Donald Lee, Head of Asia Pacific and Head of Meraki Global Advisors (HK) Ltd – Don has over 27 years of experience in Asia Pacific institutional equities split between Seoul and Hong Kong. Before joining Meraki, Don held senior management positions in the APAC -wide cash equities and client executions businesses of Credit Suisse and Deutsche Bank based out of Hong Kong.
Jeffrey Ho, Managing Director of Meraki Global Advisors (HK) Ltd – Jeffrey has over 25 years of buy-side experience trading global markets in Europe and Asia. Before joining Meraki, Jeffrey was a trader at Tora Outsourced Trading, Segantii Capital Management, and prior spent 15 years at Deutsche Bank (DB) in Hong Kong where he was a Director and Senior Trader.
Benjamin Arnold, Founder and Managing Partner – Ben previously worked as Executive Director on the equity and equity derivatives sales-trading desk at Goldman Sachs in Hong Kong and Mumbai, India with a primary focus on large non-ECM block trading. Before joining Goldman Sachs, Ben was a Vice President on the equity and equity derivatives sales-trading desk at BNP Paribas in Mumbai.
EJ Stockley, Partner and Global Head of Trading – EJ previously worked as a trader at First State Investments in the UK and Singapore, gaining global multi-asset trading experience in Pan-Asian, EMEA, and Americas markets.
Simon Kelt, Head of APAC Trading – Simon has over 15 years’ experience trading global markets in both Europe and Asia. He spent the last 10 years in Asia across Hong Kong and India, most recently at HSBC trading Asian equities with a focus on greater China market coverage where he helped develop and build out the business.
How Meraki Global Advisors can help
As a value-added service to our outsourced trading clients, we help managers create a strategic marketing strategy and increase their firm’s awareness among a unique set of investors and allocators. Our experienced team provides start-up advisory services, identifies actionable ways to improve decks and pitches, and creates prospective allocator lists for select introductions. Our services are suited for a diverse range of clients, extending from traditional long-short emerging managers in the very early stages to managers running a multi-strategy platform and existing multi-billion-dollar funds trading globally across asset classes.
As the premier global multi-asset outsourced trading firm, we take pride in putting our clients’ interests first. Built on a foundation of confidentiality, our unique conflict-free model empowers funds to garner optimal access to liquidity.
To learn more about Meraki Global Advisors’ outsourced trading capabilities and capital introduction services, visit our website www.merakiglobaladvisors.com or email firstname.lastname@example.org.
About Meraki Global Advisors
Meraki Global Advisors LLC is a FINRA registered broker-dealer and member of SIPC based in Park City, Utah. The content provided herein is not an offer, solicitation, or recommendation of any securities. Past performance is not an indication of future results. This document cannot be duplicated or copied, is protected by copyright law, and may contain privileged or confidential information. Information contained herein does not constitute tax, legal or other professional advice. Content if for educational purposes only. All rights reserved 2022.
Meraki Global Advisors (HK) Ltd is authorized and fully regulated by the Hong Kong Securities & Futures Commission (SFC).