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Why automated trading is on the rise in Asia

| Trade Automation
Li Renn Tsai headshot
Li Renn Tsai
Head of Product and Sales, Asia, Tradeweb

This article originally appeared on AsianInvestor here.

The adoption of electronic trading is well underway in Asia – a trend that is evident in the bond market. But this electronification is just the beginning of a more general move towards the use of technology making the entire trading process more efficient, according to Li Renn Tsai, head of products and sales, Asia at Tradeweb.

Once a company becomes comfortable with electronic trading, the next step is automation, which offers traders the tools to streamline workflows and add another layer of efficiency.

The benefits of automated trading can be felt at every stage of a transaction. In pre-trade, it allows a firm to better manage fund flows and data aggregation, and when it comes to post-trade, an automated approach can improve straight-through processing and analysis.

Although automation in Asia is still at a relatively early stage compared to Europe and the US, there is a strong case to be made that the adoption of automated trading tools here will be faster.

For example, it took three years – from 2017 to 2020 – for the proportion of automated US Treasury trades in London to grow from 12% to 26%. In Asia, we saw a jump of a similar scale in just over a year, with a move from 12% to 26% in the five quarters to the end of 2021.

We believe there are a number of factors that prime the region for increased adoption in the coming years.

Automating a growing market

The first is the growth of Asia’s fixed income market. Bond issuance has grown from $107 billion in 2006 to $575 billion in 2020, which translates into a corresponding increase in secondary market trading[1]. More bonds in the market translates into increased trading activity.

Our observation is that despite the market becoming more active, the number of traders in the region does not correlate with this expansion. This means that each member of a trading team is responsible for handling a growing number of trades – everything from regular, small ticket to larger transactions.

Automation helps by taking over the more straightforward trades, which allows traders to focus on transactions where human judgement is more valuable. Since automated trades are completed according to clearly defined parameters that meet the company’s individual requirements, the net result is that a greater number of trades can be handled while maintaining all the requirements of their strategy.

The benefits do not stop there, as an automated trade automatically completes much of the post-trade work that demonstrates a buy-side firm has adhered to best-practice standards. Since compliance with local execution rules and regulations can be built into the automated process, there is no need to create additional documentation. This is particularly relevant for Asian markets – such as Japan – where it is common practice to document best execution with physical documents.

The impact of index inclusion   

Another factor that makes Asia ripe for automation is the growing popularity of exchange traded funds (ETFs), which are steadily becoming a mainstream part of the regional portfolio. Over the last five years, the number of ETFs in Asia has doubled to just under 2000 products, according to ETFGI.

Companies that manage ETFs need to trade on a day-to-day basis to ensure that their assets match the underlying index that the product tracks. This tends to happen late in the trading day, with a rush of market activity, as managers make the necessary trades before the end of the session. These routine trades are a clear example of the kind of transactions that can be automated, allowing for traders to reduce their attention on everyday tasks, and focus more on strategic challenges.

The inclusion of Chinese bonds into major global benchmarks will also promote automation. The most recent inclusion event is the addition of Chinese government bonds in FTSE Russell’s World Government Bond Index (WGBI) – a process that will take 36 months, which the index provider forecasts will result in as much as $158 billion being allocated to Chinese onshore debt.

The staggered inclusion means that asset managers following the WGBI, typically passive funds, will need to make constant adjustments to their holdings as Chinese Government Bonds (CGB) gradually take their full rating. Again, this is a routine task that can be automated.

Following the trading day

Finally, there is the issue of time zones. The Asian trading day stretches across six time zones, starting in New Zealand and finishing in India. Covering the entire region in real time from a regional single office can be a challenge. The solution can be used to hand over transactions outside normal hours to automation, which completes scheduled trades without human intervention.

The same technique can be applied to markets outside Asia. European and US bonds tend to have lower liquidity during Asian trading hours. Traders in Asia can automate these trades in other regions to take place during the daytime of the market, which results in more favourable pricing.

Tradeweb’s time-release feature allows traders to pre-plan and set up trade execution ahead of busy periods or non-local trading hours; it accounted for nearly one-third of Automated Intelligent Execution (AiEX) transactions by Asia clients in the first quarter of 2022.

Concentration of automated tickets during certain times of the day means that, if dealers want to keep up with the higher number of trade enquiries, they will need to enhance their auto-quoting capabilities. Making this happen requires not only a mindset change, but also further investment in infrastructure.

Some dealers are already ahead of the game and are reaping the advantages of auto-quoting. Benefits go well beyond automation, affecting the entire trading lifecycle and resulting in more efficient pricing.

An automated future

Taken together, all these factors show that trading in Asia is likely to become increasingly automated, as broad structural developments will lead traders to hand over more of their trades to a solution that allows them to focus on the transactions where they can really add value. The end result will be that trading across the region will become more efficient, while at the same time maximizing the available liquidity.

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[1] ICMA, The Asian International Bond Markets: Developments and Trends