Papers

February 18, 2016

  • Julie Green

  • Kristi Reitnauer

  • Erin Stanton

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2015 Year in Review – Asia Pacific

Looking back at the data we’ve collected from 2015, two themes emerge: ongoing market structure developments and continued market volatility, especially in Q3.

This document highlights the impact of both of these factors on trading activity, market conditions and performance. We’ll employ detailed data analysis to answer common questions and give buyside traders insights into Asia Pacific markets.

HIGHLIGHTS:

  • How did high volatility in Q3 2015 affect transaction costs for varying order sizes?
  • How have Japan’s tick size reduction program and roll back affected the market?
  • Is the Hong Kong closing auction likely to improve trading for institutional orders?
  • Does share class affect how much it costs to invest in China?
  • How does stock composition of the Australia market affect liquidity and costs?
  • Does it matter when—day, week, or month—I trade my Asia orders?

HOW DID HIGH VOLATILITY IN Q3 2015 AFFECT TRANSACTION COSTS1 FOR VARYING ORDER SIZES?

In volatile conditions, locating block liquidity in Asian markets2 is a valuable tool for traders looking to manage transaction costs, especially for large orders.

  • As a result of global volatility, overall transaction costs across all regions increased in Q3 2015 compared to H1. The cost increase varied by market and the size of order.
  • Since the beginning of 2013, transaction costs in Developed Asia have been converging with US costs. Overall costs in the two regions were about equivalent in Q4 2015.
  • During high volatility in Q3, it was actually more expensive to trade small order sizes3 in the US than in Developed Asia.
  • However, the story is different for large orders:4 Q3 volatility made it much harder to get large orders completed in Asia Pacific, particularly in emerging markets where costs spiked by over 20bps versus Q1.

2015 Year in Review AP

HOW HAVE JAPAN’S TICK SIZE REDUCTION PROGRAM AND ROLL BACK AFFECTED THE MARKET?

The market structure change had quantifiable impacts on factors that typically drive transaction costs, namely, spread and top-of-book depth. Spreads for the TOPIX 100 are now the tightest they have been over the last three years and top-of-book depth has decreased considerably as a result of the tick size reduction program. However, these effects were overwhelmed by macro factors in the second half of 2015 and the impact on transactions costs is not easily discernable. In the wake of these dramatic trading condition changes, it becomes increasingly important for traders to understand the liquidity landscape and how the tools they employ over the life of a trade may react to varying conditions.

APAC 2015 Year in Review

TSE ‘small tick size program’

  • Phase 1, January 2014: Narrower tick sizes for securities priced between 3000 and 5000¥ and greater than 5000¥.
  • Phase 2, July 2014: Introduction of decimalization for securities priced less than 5000¥.
  • Phase 3, September 2015: Tick sizes for securities priced between 3,000-5,000¥ rolled back to 1¥ vs 0.5¥ and between 30,000-50,000¥ rolled back to 10¥ vs 5¥.

APAC 2015 Year in Review

IS THE HONG KONG CLOSING AUCTION LIKELY TO IMPROVE TRADING FOR INSTITUTIONAL ORDERS?

Particularly for liquid stocks, an auction mechanism is likely to reduce volatility. Understanding market activity around the close offers vital insight for traders when deciding how to trade their Hong Kong orders through the day, balancing liquidity requirements and price volatility.

Using frequency of change at the bid and ask as a proxy for volatility shows some striking results for liquid Hong Kong stocks. We see the last five minutes of the day to be a significantly more challenging trading period than any other for liquid securities. Less liquid securities show more consistent price discovery trends throughout the entirety of the trading day.

Volatility leading into the close is largely attributable to the current closing price mechanism—a calculation based on the median of 5 snapshots taken in 15-second intervals during the last minute of trading which makes it almost impossible for participants to execute orders exactly at the closing price.

ITG will be conducting further research on this topic going into, and after the implementation of the new HKEX Closing Auction Session (CAS), scheduled for Q3 2016.

APAC 2015 Year in Review

DOES THE SHARE CLASS AFFECT HOW MUCH IT COSTS TO INVEST IN CHINA?

There are significant differences in transaction costs, spread and volatility between China A, B and H shares which should form part of the dialogue between traders and portfolio managers when seeking China exposure.5

China A-shares and H-shares exhibited relatively similar transaction costs over the last year while costs for B-shares were generally more expensive and more volatile.

1. Spreads tightened in China B-shares towards the end of April, which corresponded with a sharp reduction in transaction costs. The rally in Hong Kong around the same time period spilled into the B-share trading and overall order sizes for B-shares between May and July 2015 looked quite similar to H-share liquidity demand. There was also some speculation during this time period that companies could convert B-shares into China A-shares, which increased demand in a somewhat overlooked security space.

2. Increased volatility in August affected all three share classes and corresponded with an increase in transaction costs across the board. The more emerging China B-share class reacted more significantly to the volatility surprise and subsequent spread surprise than the more established A and H share classes did.

2015 Year in Review AP

As part of a request for proposal (RFP), we commonly see new investors ask a potential investment manager for the average cost associated with implementating a market level portfolio. When we compare the costs associated with implementing a 100mm dollar portfolio across the various share classes, A and H shares show very similar cost profiles while B-shares are much more expensive.

2015 Year in Review AP

HOW DOES STOCK COMPOSITION OF THE AUSTRALIA MARKET AFFECT LIQUIDITY AND COSTS?

Trading in Australia is heavily concentrated in ASX 20 stocks; typically, trading in these twenty securities represents around half of the total value traded in ASX 200 stocks. Consequently, event-driven activity in ASX 20 stocks has a significant impact on any high level analysis of the Australian market. Analyzing one’s own realized transaction costs versus peer costs is a valuable technique for measuring performance in a market like Australia.

Institutional trading data from ITG’s Peer Database showed an ongoing slump in institutional activity in Australia through 2015, making it harder to get orders completed. To compound the difficult market conditions, Australia also felt the Q3 spike in volatility, illustrated by increased transaction costs in August in ASX 50 and ASX 200 securities.

2015 Year in Review AP

DOES IT MATTER WHEN—DAY, WEEK OR MONTH—I TRADE MY ASIA ORDERS?

Yes it does! And in fact, it makes a difference if you’re trading index names versus non index names, likely because of the comparative level of activity from domestic versus offshore, and active versus passive investors.

In general, Mondays are slow days for the ‘early riser’ markets, Australia and Japan, whatever you’re trading. The difference is more marked in the index names, likely because offshore institutional investors are either still asleep or awaiting further market direction before making their trades.

China, a largely domestic and retail-focused market sees highest activity on Mondays as trading resumes after the weekend.

Later in the week, Australia sees largest volumes on Thursdays, while Japan finishes the week strongly with highest trading volumes on Fridays.

2015 Year in Review AP

Similarly, we examined trading volumes on the last day of every month by market.

1. Trading on the last day of the month for index names shows consistently more activity than non-index names.

2. Almost 6% of trading activity in Japan names occurs on the last day of the month, while about 5.5% occurs in Australia. Both retail investors and portfolio managers alike tend to evaluate their holdings toward month-end which can lead to increased activity.

Especially for large order sizes, it’s wise for the desk to keep in mind which days have more turnover, in order to avoid market impact.

2015 Year in Review AP

ASK US A QUESTION

We’ve taken a look at a few market structure and volatility related questions that affected transaction costs in 2015 and encourage you to raise any specific questions you may have to the local Trading Analytics Team. We will also continue to publish client-raised questions on the Analytics Incubator as part of our Question of the Week series. To raise a question please email us directly at ap-apr@itg.com. ITG’s Trading Analytics team invites you to ask us a question about the Asia markets that could help improve your trading. Using the ITG Peer Database and a wide range of market data and analytics tools, we provide evidence and data-driven insights that can be acted upon to improve trading outcomes.

Email ap-apr@itg.com with your questions.

ABOUT ITG

ITG is an independent broker and financial technology provider that partners with global portfolio managers and traders to provide unique data-driven insights throughout the investment process. ITG helps clients understand market trends, improve performance, mitigate risk, and navigate increasingly complex markets. ITG is headquartered in New York with offices in North America, Europe, and Asia Pacific.


 

1 All transaction cost observations are pulled from ITG’s Post-Trade Peer Transactional Database, which contains order-level information from approximately 180 buy-side institutions.
2 When drilling into transaction cost data it became apparent that some markets in Asia which may be classified as ‘developed’ by certain
criteria, display very different characteristics to other markets. We therefore decided to classify APAC markets as follows for this research:Developed: Australia, Hong Kong, Japan; Semi-Developed: Korea, New Zealand, Singapore; Emerging: China, Indonesia, Philippines, Taiwan,Thailand
3 Small order sizes are defined as less than 15% median daily volume.
4 Large order sizes are defined as greater than 100% median daily volume.
5 Share class definitions:
A-shares: Chinese companies incorporated on the mainland and traded in Shanghai or Shenzhen, quoted in RMB
B-shares: Chinese companies incorporated on the mainland and traded in Shanghai and quoted in USD or traded in Shenzhen and quoted in HKD (open to foreign ownership)
H-shares: Chinese companies incorporated on the mainland and traded in Hong Kong