Tora chief predicts high equity volatility until 2012

There are two outlooks as to what is likely to happen in equity markets over coming months after the disaster in Japan, says Robert Dykes, San Francisco-based chief executive of US agency broker Tora Trading.

On one hand, some commentators suggest there will be substantial equity price volatility for a few months, which will then settle into its pre-crisis range or even below. But the more likely outcome, Dykes feels, is that volatility will remain elevated and volumes “abnormally high” for the rest of year.

Information will continue to flow from conflicting news stories about power plant construction, the clean-up and implications for nuclear power, says Dykes, with markets likely over-reacting.  

Moreover, there has been a lot that is “under-reported”, such as Tokyo Electric Power Company operating at less than 30% of its pre-disaster nuclear capacity, notes Dykes.

“That’s not sustainable, especially in the summer months, where capacity shortfall will be 25–40%, depending on who you believe,” he says. “People are more focused on the clean-up at present than on power consumption.”

That said, the Tokyo Stock Exchange hasn't had any significant problems, he says, apart from matching delays, with some trades taking seconds rather than milliseconds.

But daily average trading volumes for Tora are up 20% compared with before the quake, adds Dykes, and overall the trading infrastructure has held up very well, despite elevated volatility.

“30-day volatility on the Topix index was in the teens pre-March 11 and in the mid-40s post-March 11," he adds. "That is a huge increase.”

Equally, the company’s data centres were fine, although there were some problems with certain links from some brokers to exchanges.

Meanwhile, trading volumes are up Asia-wide post-quake; the region is a “very integrated economy”, says Dykes. He points to the fact that electronics firms such as Apple have seen their share prices fall because of concerns over the supply of components from Japan.

Dykes says the fact that hedge fund closures slowed towards the end of 2010, coupled with more new launches, should boost trading volumes in 2011, since these firms account for 70% of Tora’s client base. The remainder is made up of banks and long-only asset managers.

“Hedge fund launches are not happening in Japan to the extent they did previously,” he adds, “but they are in Hong Kong and Singapore.”

According to data provider Eurekahedge, there were 142 Asian hedge fund launches last year, of which 37 were in Hong Kong, 30 in Singapore and 13 in Japan. There have been a total of 13 launches so far this year, of which six were in Singapore, two in Hong Kong and three in Japan.

The first quarter of 2011 has been one of the best quarters Tora has had in a long time, says Dykes. He adds that the firm is working on strategic partnerships that will drive growth in 2012, but declined to give more detail.

There remains potential for further growth in the region, says Dykes, given that 17% of the market is traded on alternative venues in the US, between 3% and 5% in Europe, and less than 1% in Asia.