A forum by the industry... for the industry

There's barely a day that goes by that doesn't have a financial services conference somewhere in Asia. The concept for Face2Face grew from requests from the industry for an impartial and objective forum on electronic trading in the region. The brief was clear: No lengthy powerpoints. No sales pitches. No commercial agenda. Simply a session designed by the buy and sell-sides to discuss the latest information on electronic trading, FIX and DMA - and all Face2Face.

On the 5th September more than 160 delegates came together in Mumbai for the inaugural Face2Face forum. The result? A non-stop, frank dialogue about the challenges ahead and the best way forward.

Setting the Scene: Exchange Updates

Anjan Choudhury, CTO, Bombay Stock Exchange
Vidhu Shekhar, Assistant VP, National Stock Exchange

As one of the fastest growing and most dynamic markets in the world, the forum opened with the Bombay Stock Exchange's Anjan Choudhury, leading delegates through the developments on the BSE and, most importantly, the roadmap for the future. In particular Choudhury touched on the impact electronic trading was having on the Exchange and its users.

Choudhury was then joined by NSE's Vindhu Shekhar who reinforced the commitment to change coming from the exchanges.

Overview of Electronic Trading

Dean Chisholm, Regional Head of Operations, Asia Pacific, Invesco
Ravi Manchi, President, Westwater Corp
Ross Davies, Director, Head Listed F&O Sales India,Deutsche Equities India Pvt

In a lively panel discussion covering global developments and attitudes in the arena of electronic trading, which saw Dean Chisholm fed live from HK through the wonders of the latest video conferencing technology, the speakers - fuelled by questions from the floor - covered the major issues affecting electronic trading. In particular they focused on its impact on small to medium sized firms, and on developing markets/exchanges.

For smaller firms, while many understand the need to upgrade, the capital cost of new technology remains a major factor, Invesco's Dean Chisholm explained. When asked how much money could reasonably be managed from an Excel spreadsheet his candid answer was, "not enough to run a good business."

It was agreed by the panel that technology progression substantially reduced risk and, in particular, execution risk which was picked as a major issue for all companies. Chisholm confirmed that Best Execution was becoming better defined, allowing buy-side clients to more easily quantify their brokers' performance.

Questions from the floor focused on the best algorithm strategies for the Indian market, to which the key advice from the panel was to start simple. "Don't go for the black box at the bottom of the list. You must understand your objective, depending on the size and liquidity that matches your trading strategy," said Chisholm.

For Exchanges, the panel explained it was a challenge to rapidly understand the range of algorithms available and the impact of their deployment in a market. However, they challenged that despite much of the trade in India coming from retail investors, algorithms and high frequency systems would broaden the liquidity, instead of leaving market participants more exposed.

Asked by the National Stock Exchange of India's (NSE) Vidhu Shekhar for his wish-list for the Exchanges, Deutche's Ross Davies said: "Make it easier for institutional investors to access these markets by cutting latency and bringing clarity to regulation; Introduce DMA to allow for co-location; and reduce fees."

Common issues worldwide included the rise of DMA, the growth in the use of algorithms, a rise in liquidity venues, performance improvements by exchanges and the rise in EMS (Execution Management systems).

Trading India

Todd Prado, Director of Regional Trading, Janus Capital
John Fildes, Managing Director, Instinet Asia Pacific & Co-Chair FPL Asia Pacific Regional Committee

A specially recorded 'Trading India' was aired during the late-morning session with Janus Capital's Todd Prado and Instinet Asia Pacific's John Fildes hammering out the large number of changes driven by the regulator and how that has affected international investors. These included PNotes, introduction of stock lending, opening up of pure DMA and the proposed new margin requirements.

Prado and Fildes spoke of the initial confusion that often comes with the announcement of any new regulation and said India had lessons to learn. While the country had taken great leaps forward since 2000, the international trading community wanted to encourage the regulators and exchanges to open better communication channels with the industry in regard to the development and implementation of new regulations.

This, the panelists argued, would allow India to learn from the successes and avoid the pitfalls from the experience of the international trading community. This would, they said, move the agenda forward more efficiently for the benefit of all market participants.

On a more contentious note, anonymity in the trade process was raised as the single biggest headache for international institutions trading in India. Whilst it was difficult to pinpoint the source of trade information leakage, Prado and Fildes said it was an unfortunate reality which was having a major impact on the cost of their trades and would have to be addressed to allow India to truly join the global markets.

Development and implementation of an electronic trading strategy

Jesse Lentchner, CEO, Goldman Sachs India
Danny Lee, Vice President, Regional Business Manager, NYFIX Asia-Pacific
Ronald Alan Fons, Asia-Pacific Marketing Manager, Financial Markets, Cisco Systems (HK) Ltd
Vishal Mainkar, Head, Institutional Marketing, Financial Technologies (India) Ltd

Taking the example of Japan in the early 2000's, Goldman Sachs India's Jesse Lentchner gave a first hand assessment of his firm's implementation of an electronic trading strategy in this market, and related it to India's current development. In what may not have been easy listening for some, Lentchner explained that the use of electronic trading had allowed it to reduce its execution trading team to one third its original size over a two year period.

Joining the session, NYFIX Asia Pacific's Danny Lee, CISCO's Ronald Alan Fons and FT's Vishal Mainkar expanded on the lessons learned in Japan, and further a field, and how India could benefit from pre-tested best practice. When asked to pick the single most important investment that a firm implementing an electronic trading strategy can make, the panel agreed that investing in a manager(s) with implementation expertise (and experience) was crucial. Many costly investments in technology have not created returns for businesses, if they are not made in the context of a coherent implementation strategy. Firms need to spend the money on buying in the expertise from the outset, they agreed.

The state of electronic trading in India/Emerging markets - the status "quo"

Kaku Nakhate, Managing Director & Co-Head of Equities, DSP Merrill Lynch Ltd
Yogesh Bhatt, Vice President - Investments, ICICI Prudential Asset Management
Richard Man, Head of Sales, Asia Pacific, BT Global

The afternoon session began with an assessment of the state of electronic trading in India from both buy and sell-side perspectives. BT's Richard Mann asked DSP Merrill Lynch's Kaku Nakhate and ICICI Prudential Asset Management's Yogesh Bhatt about the status of DMA within their firms.

Both said DMA would be rolled out in the near future, with DSP Merrill Lynch taking advantage of both their experience gained from the US, combined with development expertise in India.

Touching on the relevance of DMA, or how quickly it should be implemented, both agreed that it would depend on the size and needs of your trading team. They added that DMA would not necessarily change the need for buyside to use sellside expertise and solutions, however DMA represents a way to execute low touch trades without the need to always pick up the phone.

One of the highest growth areas for electronic trading, Nakhate and Bhatt agreed, was in the futures and options market. If regulations change, this could be the largest market for DMA in the next couple of years, Nakhate said.

To summarise, the panel concluded that the reality of DMA adoption was that if firms in India wished to increase their throughput, there was a need for greater investment.

How much electronic trading is going on right now in India?

Peter Jardine, Director, Broker Network, Marco Polo Network
P.S. Praveen, Director & Country Manager, Transaction Network Services India
Bruce Benson, Managing Director, CLSA

The panel recognised that the adoption of electronic trading in India was in its infancy and that domestic adoption was slow. However they agreed that the potential for growth was strong, with some analysts forecasting more than 10% of the market using DMA by 2010.

The main OMS and EMS suppliers are still local firms such as FT, Omnysis and TCS, but that international vendors were starting to build their markets in India. This, the panel agreed, would bring increased competition, better exposure to mature market practices and would, eventually, bring down costs.

Witness a DMA trade!

Chetan Pandya, Head of IT, Kotak Securities - Institutional Equities

Implications of DMA for the buy-side

George Molina, Director of Asian Trading, Franklin Templeton Investments & Co-Chair FPL Asia Pacific Regional Commitee
Prakash Natarajan, Vice President, Global Equity Trading, Franklin Templeton Asset Management (India) Pvt Ltd
Paul Saubestre, Managing Director, Head of Trading, Client Execution Platform, Asia - Japan BNP Paribas Securities (Asia) Ltd
Vineet Bhatnagar, MD & CEO, MF Global India

Most of the topics during the day had centred on DMA. The final session started with Kotak Securities' Chetan Pandya demonstrating a DMA trade using different EMSs available in India. He opened the discussion by saying, "Technology is like a tiger. Once you get on its' back, you can't get off without being mauled."

Comments from the floor peppered the demonstration and ensuing panel discussion, starting with a deceptively simple commercially-focused question: "What is the demand from the domestic buy-side?"

MF Global India's Vineet Bhatnagar said the buy-side were increasingly asking the right questions.

Franklin Templeton Asset Management's Prakash Natarjan said DMA would play a vital role in helping to prioritise trading strategy, which would lead to increased volumes. "It's taking some time to fire up, but I have no doubt it will take off in a big way very soon," said Nararjan.

Franklin Templeton Investments' George Molina agreed: "Everything we're hearing here about the local buy-side being cautious is the same as we've heard in other Asian markets over the past 10 years. But give it a year and people will realize it's a must and it will pick up fast. It will be an avalanche. I honestly feel things will move faster here than in any other markets in Asia."

"The exchanges are going to see faster and better trading. It will increase liquidity and make it more market-friendly," concluded Molina.

Bhatnagar said that, for the most part, resistance was not coming from the buy-side. "The fear factor is from the sell-side. They are the first point of resistance. The sell-side needs to see the benefits."

BNP Paribas Securities' Paul Saubestre struck a note of moderation, explaining to the audience that DMA should be seen within a range of trading options. "It's an add-on. It's not the only way that trades are executed," he said.

Molina added that firms would need all the tools available, and also customization. "The buy-side like customization from the broker. The broker with the biggest menu will get the most trades," he stated.

Discussion turned to the need for brokers to differentiate themselves in a DMA trading environment. "DMA will be commoditised, so you won't need 10 brokers. You'll just need a few on the ground," explained Molina, adding that to ensure a competitive edge "brokers will need to stand out by creative thinking."

Chetan wrapped up the session with a simple call to action: "You need to beef up knowledge, investment in your team and technology."

On a final note, the FIXGlobal Face2Face team thanked all the speakers, sponsors and delegates for enabling them to bring the market participants in India together to talk about the subjects and issues that are relevant to them, bringing value to all involved.