Racing the Dragon – Asia takes FX center stage

David Wilkinson

The FX market has been enjoying renewed popularity with Asia’s investment elite this year as other investment options have been on precarious ground. Since 2010 aggregate forex trading across Asia has been greater than the US, according to a study by the Bank of International Settlements.

Tokyo has emerged as the largest OTC forex market after London and the US. China is Japan’s largest trading partner but with over two-thirds of their trade denominated in US dollars there is plenty of scope for growth in the new direct yen-yuan FX market that opened in June reducing costs and risks. Competition across Asia is set to heat up with Singapore, as the second largest FX trader and the ambitious rise of Hong Kong, which is angling to be the capital for offshore RMB, pushing Asia to the center of the global FX business.

The FX vogue is not looking like it will take a back seat in the Asian investment sector, with leading banking executives seeing it set to continue as a big growth area in the private client sector.

According to EBS Asia, offshore growth in FX is coming from BRIC and emerging markets as their currency controls relax. Popular FX trades involve the Aussie dollar, Sing dollar, Yuan, Canadian dollar and gold.

A series of factors have bolstered momentum including a better understanding of the FX market and low interest rates, which have given clients an urgency to get ROI on their cash. Also the profile of the high yield Asian investor is changing from old money to cashed-up first-generation entrepreneurs, many of whom are already conversant in dealing with multiple currencies as part of their globally focused businesses.

Despite the surge in activity liquidity can be quite hard to find. Asian trading differs in many ways from in the US or Europe, with information regarded at a higher premium as it is often more difficult to come by.

As competition heightens, understanding where liquidity comes from becomes more essential.

Market fragmentation was a catalyst for sweeping change in the Western markets, creating both high frequency trading and a thirst for technology that would give players the edge against competitors. Equity traders explain that they see their role as the information broker feeding back news and experiences to investment managers.

More cautious regulatory paths in Asia have stemmed the potential pace of competition. As there is no pan-Asian regulator, each market tends to move on its own terms.

Technology is set to underpin the rise of any market in the financial space and keeping up with the high pace of change will be key.

Algorithms are now monitoring every machine-readable market price and news source on the planet with round trip times from Hong Kong to London occurring literally in the blink of an eye. With so much data available, the winners will be those markets and players that make the wisest and fastest use of both information and technology.

Fueling growth in the Asia-Pacific finance sector is the trend of global traders flocking to co-locate in the region. Around 33% of US firms are currently trading in one or more Asia-Pacific market and this is expected to grow to 48% in three years. Again Singapore, Hong Kong and Tokyo will be the hotspots and are expected to catch up with Frankfurt as the place to be for automated traders in the next three years.

These network-rich trading hubs will also be forced to compete on a technology level. Customers and trading partners will make their selections based on the best distributed networks of trading intelligence and digital services. Those trading hubs offering the widest range of connectivity will garner the edge. While cross connect options allow investment firms to do business with many service providers and deal with many counterparties, it also means they can easily swap them out when they fail to meet evolving service needs.

For deeper insights from leading finance executives in the region please click here.

 

David Wilkinson
David Wilkinson Senior Director & Asia Pacific Lead, Global Vertical Marketing