The Gateway to Algorithmic and Automated Trading

Hong Kong does the math. Focus on cost + infrastructure investments = more algo trading

Published in Automated Trader Magazine Issue 27 Q4 2012

If mainland Chinese markets are in the toddler phase when it comes to algorithmic trading, Hong Kong markets look fairly grown-up. But industry executives say they still have plenty of scope to get bigger, faster and stronger.

There is a discernible appetite for more algorithmic trading in the Hong Kong market, according to David Wilkinson, senior director of business development for Asia Pacific at data centre provider Equinix. The driver, as elsewhere, is the need to squeeze trading costs. "We've seen a desire to learn more, and there is already a high level of existing knowledge," he said.

Algorithmic trading is a standard feature across the market, especially concentrated in Hong Kong in derivatives trading, which is exempt from the territory's 0.1 percent stamp duty on cash equities. "The level of sophistication in terms of algo use in Hong Kong is quite high amongst the international money management group," said Rob Laible, head of Asia ex-Japan cash sales trading at Nomura.

Rob Laible

Rob Laible

"Anything listed on the Hong Kong exchange people trade via algorithms, whether it be warrants, ETFS, derivatives et cetera," said Greg Lee, Deutsche Bank's head of Autobahn Equity electronic trading for the Asian region. "In the futures space now there are a lot more algorithms for listed futures, and in the FX space as well people are rolling out algorithms."

High frequency trading also features outside the cash equities market.

"Are there people who run market-making strategies in the Hong Kong equity market? No. Typically spreads are too wide, costs are too great, so there is no market-making structure in cash equity instruments," Lee said. By contrast, HFT is focused on warrants, index instruments, futures and arbitrage strategies, along with long-short investors using automated strategies.

Consulting firm Greenwich Associates said in a report earlier this year that there has been a sharp uptick in the use of algorithmic trading strategies across Asia; they now account for 22 percent of Asian equity trading volumes. The report says institutions using algorithmic trading expect the proportion to grow to 26 percent in three years' time.

"We see about 25 percent of orders (in Hong Kong) coming through some sort of algo engine," said Chris Jenkins, head of trading technology provider TORA's Asia sales and operations. "It's either via the buy-side, which is rarer, or more often via brokers." The biggest users tend to be hedge funds, especially long-only funds, trying to avoid market impact for block trades.

Jenkins said about 60 percent of orders are based on VWAP, but a recent trend has been increasing interest in more sophisticated algorithms. "They're a basic form of distribution for brokers now; everyone is using vanilla algos. What you'll see now is growth in more sophisticated algorithms, built around sophisticated strategies."

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