Technology heals all
14 July 2017
Asia has an ageing system of fragmented processes that have failed to keep up with the rapid growth of the markets and increasingly complex trading strategies, according to Laura Allen of Trading Apps
Image: Shutterstock
The Asia Pacific region continues to both deliver and promise steady economic growth. Despite an expected slight deceleration of GDP growth in the Asia Pacific economies to about 5.25 percent during 2017, the area remains the most dynamic region of the global economy.
That being said, the region faces a number of external challenges, including slow growth in advanced economies, a broad slowdown across emerging markets, weak global trade, persistently low commodity prices, and increasingly volatile global financial markets. Also in the short term, China’s transition to a new growth model will most likely cause disruption among its regional partners. And perhaps the most unpredictable challenges are those presented to the region in regards to the uncertainties of the new US administration and the looming threat of a trade war.
On top of these challenges, developed markets such as Australia and New Zealand were in the late throes of dramatic housing booms in 2016, with record lows in mortgage rates, while low growth and inflation have featured in Japan. Meanwhile, new governments raised questions in India and Indonesia, while political scandal continues to affect South Korea. Yet investor confidence is back.
By and large, the steady growth story is triumphing and this is reflected in the securities lending market. Many Asian markets are still trading at 2015 price levels and therefore represent fair-to-reasonable value for investors. Opportunities for better long-term returns will come from an increased asset allocation across Asia’s developed, emerging and frontier markets, giving rise to continued growth in lendable assets.
Figure 1: Asian equities. Source: IHS Markit
For developed markets, this increase in lendable assets has caused spread compression and, for emerging markets, it has resulted in greater liquidity and spread stability. Despite this, Asia remains at the forefront among securities lenders and their agents for its revenue potential as opportunities open up across the region.
If we look back eight years, outside of Japan, Hong Kong and Australia, there were limited opportunities within Asia, whereas today there are 11 active markets, each unique in structure, liquidity and workflow. The breadth of names traded (with the exception of Australia) has significantly grown as investors become more comfortable with the market resulting in deeper lending inventory.
The development and evolution of the Asian markets continues and as Figures 1 and 2 indicate, portfolios are beginning to broaden. The increase in market opportunities and available liquidity is attracting additional market participants. Major quant funds have been trading Asia since the early 2000s, but the lack of breadth made it challenging. Now that the markets have a greater number of names with much better liquidity, nearly all quant-based funds are investigating the markets via back testing to see if their models work for these subtlety different markets when compared to Europe and North America. This paradigm should continue to fuel the growth in equity lending in Asia during 2017.
Last year, Asia’s hedge funds opened at the slowest rate since the turn of the century, with only 67 new launches in 2016, a third straight year of declines. However, capital inflows to Asia’s hedge funds remains strong. Rather than allocating money to new funds that demand high fees and often deliver lacklustre returns, investors have chosen to go with larger, more established managers, typically with assets of at least $500 million, and tend to resemble conventional money management firms, with high-cost structures and lower fees. A decade ago, the average hedge fund in Asia was in the $100 million to $400 million range, where now there are several multi-billion US dollar funds that are backed by major publicly traded parent companies. Following the financial crisis, Asia was viewed as the saviour to profitability for all investment banks and alpha generators, which moved senior bankers/traders and capital to the region. This trend has stuck over the past 10 years.
Of course, with growth comes challenges, and nowhere more so than in Asia. Â鶹´«Ã½ lending participants in this region must continue to evolve and embrace this dynamic market and its evolution. Participants require tools that will allow them to handle the growth of markets and the number of securities traded across a non-harmonised regulatory landscape, while minimising risk. Growth across markets and number of securities traded has resulted in a significant rise in trading volumes. A recent IHS Markit report showed a 90 percent increase in the average number of transactions between 2008 and 2016. Overall, a total of 380,000 securities lending transactions were undertaken in 2016 across Asia markets. Trade automation and process efficiency will certainly continue to gain momentum as this region’s growth trajectory unfolds.
Figure 2: Average number of equities with stock loan volumes. Source: IHS Markit
Sophisticated software will enable both lenders and borrowers to adhere to individual market regulatory requirements without hindering locate processing and automatic trading. In such a dynamic market, firms require the ability to view total inventory, both internal and external, and configure rules at the market, security and counterparty level to ensure timely and efficient processing.
Rather than embark on a timely and costly in-house build, firms are increasingly looking at external vendors to provide technology that revolutionises and transforms the manner in which they run their business. The key drivers for Asian market participants are higher lending and borrowing volumes, faster overall response times, and greater revenue generation.
Our experience has taught us that rapidly growing and expanding markets are perfect opportunities for the types of efficiencies and automation that our applications offer. Trading Apps is a firm with global clients, but no matter where our clients sit in the world, they are being asked to achieve more with fewer resources. Since 2011, we have been developing targeted applications that continue to raise the bar regarding automation, revenue optimisation and risk mitigation.
In common with many other securities lending regions, Asia has an ageing system of fragmented processes that have failed to keep up with the rapid growth of the markets, the number of active securities and the complex trading strategies. The need for technology solutions to solve for these issues will result in both an exciting and a challenging year for those focused on achieving more in Asia.
That being said, the region faces a number of external challenges, including slow growth in advanced economies, a broad slowdown across emerging markets, weak global trade, persistently low commodity prices, and increasingly volatile global financial markets. Also in the short term, China’s transition to a new growth model will most likely cause disruption among its regional partners. And perhaps the most unpredictable challenges are those presented to the region in regards to the uncertainties of the new US administration and the looming threat of a trade war.
On top of these challenges, developed markets such as Australia and New Zealand were in the late throes of dramatic housing booms in 2016, with record lows in mortgage rates, while low growth and inflation have featured in Japan. Meanwhile, new governments raised questions in India and Indonesia, while political scandal continues to affect South Korea. Yet investor confidence is back.
By and large, the steady growth story is triumphing and this is reflected in the securities lending market. Many Asian markets are still trading at 2015 price levels and therefore represent fair-to-reasonable value for investors. Opportunities for better long-term returns will come from an increased asset allocation across Asia’s developed, emerging and frontier markets, giving rise to continued growth in lendable assets.
Figure 1: Asian equities. Source: IHS Markit
For developed markets, this increase in lendable assets has caused spread compression and, for emerging markets, it has resulted in greater liquidity and spread stability. Despite this, Asia remains at the forefront among securities lenders and their agents for its revenue potential as opportunities open up across the region.
If we look back eight years, outside of Japan, Hong Kong and Australia, there were limited opportunities within Asia, whereas today there are 11 active markets, each unique in structure, liquidity and workflow. The breadth of names traded (with the exception of Australia) has significantly grown as investors become more comfortable with the market resulting in deeper lending inventory.
The development and evolution of the Asian markets continues and as Figures 1 and 2 indicate, portfolios are beginning to broaden. The increase in market opportunities and available liquidity is attracting additional market participants. Major quant funds have been trading Asia since the early 2000s, but the lack of breadth made it challenging. Now that the markets have a greater number of names with much better liquidity, nearly all quant-based funds are investigating the markets via back testing to see if their models work for these subtlety different markets when compared to Europe and North America. This paradigm should continue to fuel the growth in equity lending in Asia during 2017.
Last year, Asia’s hedge funds opened at the slowest rate since the turn of the century, with only 67 new launches in 2016, a third straight year of declines. However, capital inflows to Asia’s hedge funds remains strong. Rather than allocating money to new funds that demand high fees and often deliver lacklustre returns, investors have chosen to go with larger, more established managers, typically with assets of at least $500 million, and tend to resemble conventional money management firms, with high-cost structures and lower fees. A decade ago, the average hedge fund in Asia was in the $100 million to $400 million range, where now there are several multi-billion US dollar funds that are backed by major publicly traded parent companies. Following the financial crisis, Asia was viewed as the saviour to profitability for all investment banks and alpha generators, which moved senior bankers/traders and capital to the region. This trend has stuck over the past 10 years.
Of course, with growth comes challenges, and nowhere more so than in Asia. Â鶹´«Ã½ lending participants in this region must continue to evolve and embrace this dynamic market and its evolution. Participants require tools that will allow them to handle the growth of markets and the number of securities traded across a non-harmonised regulatory landscape, while minimising risk. Growth across markets and number of securities traded has resulted in a significant rise in trading volumes. A recent IHS Markit report showed a 90 percent increase in the average number of transactions between 2008 and 2016. Overall, a total of 380,000 securities lending transactions were undertaken in 2016 across Asia markets. Trade automation and process efficiency will certainly continue to gain momentum as this region’s growth trajectory unfolds.
Figure 2: Average number of equities with stock loan volumes. Source: IHS Markit
Sophisticated software will enable both lenders and borrowers to adhere to individual market regulatory requirements without hindering locate processing and automatic trading. In such a dynamic market, firms require the ability to view total inventory, both internal and external, and configure rules at the market, security and counterparty level to ensure timely and efficient processing.
Rather than embark on a timely and costly in-house build, firms are increasingly looking at external vendors to provide technology that revolutionises and transforms the manner in which they run their business. The key drivers for Asian market participants are higher lending and borrowing volumes, faster overall response times, and greater revenue generation.
Our experience has taught us that rapidly growing and expanding markets are perfect opportunities for the types of efficiencies and automation that our applications offer. Trading Apps is a firm with global clients, but no matter where our clients sit in the world, they are being asked to achieve more with fewer resources. Since 2011, we have been developing targeted applications that continue to raise the bar regarding automation, revenue optimisation and risk mitigation.
In common with many other securities lending regions, Asia has an ageing system of fragmented processes that have failed to keep up with the rapid growth of the markets, the number of active securities and the complex trading strategies. The need for technology solutions to solve for these issues will result in both an exciting and a challenging year for those focused on achieving more in Asia.
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