Trading in the Asia-Pacific region has increased in recent years, more so than in the West. Its “third-mover advantage” has enabled it to learn from mistakes made in the West. Among the key considerations that drive the trade life cycle are the management of big data (complex datasets), investments in trading algorithms and infrastructure, management of regulations that affect high-frequency trading, and preemptive pre-trade risk management.
Trading firms constantly face issues in regard to competition, trading costs, changing technology, geopolitical events, and fragmented regulation. To keep ahead in the trade life cycle, firms need to invest in technology, trading styles, and human capital. The author considers four main points for trading in Asia, a region that is seeing rapid changes in regulations governing trading, trading infrastructure, and automation, among other innovations.
How Is This Research Useful to Practitioners?
The author discusses four considerations that are important in the trade life cycle: big data management, algorithmic trading technology requisition, management of regulations that cover high-frequency trading, and preemptive pre-trade risk management. These factors affect the risks and profitability of trading firms.
Big data management is about managing not only the scale of data but also advancements in computing power that have enabled businesses to benefit from deeper and more-focused analysis. Accurate data are necessary for strategy modeling and trade performance analysis to generate alpha and manage risk. Price analytics for measuring trade performance are only possible with high-quality data.
Algorithmic strategies have become prevalent as a way to exploit market inefficiencies, although the environment in Asia differs from that in the West because of longer distances, differing trade costs, higher latencies, and varying regulatory controls. Firms should work with quants and traders to develop profitable trading algorithms and with vendors to implement good infrastructure.
Regulators have been training their sights on high-frequency trades because of their tendency to remain under the radar of oversight, and some Asian regulators have already instituted requirements that algorithms be checked and audited. Others have disallowed them from some markets altogether. Finding a consistent way to trade across markets with varying regulations will be challenging because governments, exchanges, and investors in different regions all have their own interests to pursue.
Pre-trade risk is an important area to monitor; it can help prevent systemic instability and market disruptions. “Runaway checks,” used to identify increased risk or problems from algorithmic trading, can be instituted by firms as controls to safeguard firm profitability as well as the market’s stability.
How Did the Author Conduct This Research?
The author studies the regulations that affect trading in Asia and makes a comparison with regulations instituted in Western markets. Such market conditions as available infrastructure and limitations are also studied across the different geographical locations in Asia.
Firms that are familiar with trading in Western markets, where infrastructure and regulations have been in a mature state for decades, will find being new entrants to Asia daunting. Different regulations and market conditions require traders to equip themselves with adequate infrastructure and technologies to ensure profitability and to keep risks in check.