SGX improving market structure: PGI head trader
Recent moves by the Singapore Exchange look set to benefit liquidity, but Australia remains the pace-setter in the region on market-structure reform, argues the co-head of global equity trading at Principal Global Investors.
SGX's reduction of lot size from 1,000 to 100 shares in January should help boost liquidity, especially for retail investors, says London-based Huw Gronow, who oversees Asia and Europe equity trading for the US firm*.
He also sees the January co-location tie-up between the Singapore and Japan bourses as potentially impactful for Asean as cross-border competition and co-operation evolves.
SGX is trying to attract different types of liquidity to boost its market share, Gronow notes. This may help to drive up volumes and tighten spreads in Asia, as it has in Europe, and lead to more high-frequency trading (HFT), he adds.
PGI has been vocal about the potentially negative effects of HFT, in respect of how it can harm long-term investors and undermine trust in markets if not regulated appropriately.
“Just to be clear, we say HFT is neither good nor evil,” says Gronow. “What we ask regulators to look at are unchecked structural issues that allow informational asymmetries to provide potential advantages to some participants over others, over and above the use of faster technology, with which we have no issue.”
But this is currently less of an issue for Asian regulators than it is for those in Europe or the US, where there are highly fragmented and competitive marketplaces.
The Australia Securities and Investments Commission (Asic) has led the way in terms of market structure reform, argues Gronow. For example, he points to the price-improvement rule implemented by Asic that went on live on May 27, 2013. It stipulates that any crossing below a certain block threshold must provide price improvement versus the best bid and offer.
The clear benefit of this is that all crossing trades receive a price improvement, and not just one side of the trade, he notes. Overall a growth in blocks is beneficial to investors that generate orders of a size that cannot be worked in-market without significant cost impact, adds Gronow. Both buy and sell side desks were finding it increasingly difficult to work these large orders in market without excessive market impact.
Meanwhile, Gronow points to the recent reduction in Jan 2014 (phase 1) and July 2014 (phase 2) in tick size in Japan at the Tokyo Stock Exchange. This is something of a controversial move, as in theory it could encourage the growth of HFT activity, he says. Phase 3, where some tick sizes are in fact increased, is scheduled in September 2015.
Gronow's Asia team comprises two traders in Singapore – Miles Yung and Somchai Goh – and one in Japan, Harumi Tanaka, supported by the global team in London and Des Moines, Iowa. The desk currently only trades cash equities but may look to equity derivatives, as and when product demand dictates.
PGI trades all 12 main markets in Asia, including the likes of Indonesia and the Philippines. Frontier markets such as Bangladesh and Vietnam would be the next likely stop, depending on the mandates the firm picks up.
As for the Chinese market, PGI sees the Shanghai-Hong Kong Stock Connect as a very important development, but is waiting to see how it evolves. “There’s nothing specific we’re concerned about,” notes Gronow, saying the firm would prefer to see technical difficulties ironed out in areas such as settlement before it takes the plunge.
The firm is also keen to see how the Asean trading link between the Malaysian, Singapore and Thai bourses evolve, for which the reception has also been muted so far.
*See the forthcoming March issue of AsianInvestor for more from this interview with Huw Gronow, and how his team operates in Asia.