The Gateway to Algorithmic and Automated Trading

Enter the dragon. How bleak trading in China heralds a bigger focus on algos

Published in Automated Trader Magazine Issue 27 Q4 2012

It's been a grim year for human traders in China, as volumes and prices on Chinese exchanges have fallen to multi-year lows. Yet the challenging environment is also driving firms to look for efficiencies - and that spells an increased focus on algorithmic trading. The use of algos may be starting from a very low base, and the market may have its share of regulatory constraints. But there are plenty of signs that automation will only increase as traders grow ever more sophisticated. Mary-Ellen Barker reports.

From Shanghai, Hongjie Qu, head of China electronic trading for UBS, has been watching the mainland China market hitting new lows almost every day. Still, it isn't all bad news.

"It could be positive in a way," Qu said. "When the market really turns down, institutions pay bigger attention to trading costs, impact, and the quality of execution. So from that point of view it's good for brokers like us who can offer them better solutions."

Hong Kong, the world's second largest exchange operator by market value, said in August that average daily turnover had fallen 23 percent from a year ago.

On the mainland the numbers were not as dire, but were still weak by any standard. On the Shanghai Stock Exchange, number six in the world rankings for domestic market capitalisation, domestic market cap fell 14 percent in the first half of 2012, and by the end of August the daily trading value of $5.6 billion was the lowest since December 2008. The value of the Shenzhen Stock Exchange, number 10 in the domestic market cap rankings, fell 10 percent in the first half.

Banks that staffed up to capture the benefits from strong growth in Asian developing economies, driven particularly by China, are cutting jobs on trading desks. Deutsche Bank was the latest, shedding 10 percent of its Asian equities sales and trading staff in early September. The Financial Times forecasts more cuts ahead for other banks.

Hua Zhang

Hua Zhang

"If the future continues down this path, with lower liquidity, lower volumes and less revenues and profits, then algorithms will become more important for people trying to automate workflow, so they can do more with less," said Greg Lee, who is based in Hong Kong for Deutsche Bank and is head of the bank's Autobahn Equity electronic trading service for the Asian region. "And if markets pick up, people are going to look to algorithms to gain an advantage, to be more efficient."

Based on current levels, there is plenty of room for algorithmic trading to grow even while turnover shrinks - especially in mainland China. Market participants and experts say algorithmic trading there is gathering steam, but is still at a very early stage of development.

Hua Zhang of financial services consulting firm Celent, who is based in Beijing, estimates that algo trading now accounts for less than 1 percent of securities trading in China. He forecasts growth to about 2.5 percent in 2013. Algo-based trading is now concentrated in futures, where it accounts for 10 percent or more of volumes.

Qu agrees that algorithmic trading in China is increasing. "In the past two to three years algorithmic trading has come from mystery to a real and known practical trading tool in China," he said. He estimates that the dozen or so large mutual funds operating in China now execute around 30 percent of their volumes using algorithmic trading, accounting for about $0.4 billion a day of transactions in A shares - the Chinese share class quoted in renminbi and open only to Chinese investors, or foreign investors licensed under the QFII (qualified foreign institutional investor) scheme. B shares are quoted in foreign currencies and are open to foreign investors.

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