Q1 2013 ITG Liquidity Research Liquidity Barometer: Asia Pacific Q1 2013 Partnering with:
Liquidity and trading costs Optimism sustained In Asian equity markets, liquidity rose throughout the first quarter of 2013. ITG s Asia Pacific Liquidity Indicator stood at 1,143 at the end of March, a rise from 1,110 in February. The trend was consistent across all Asian markets, but was particularly notable in Japan and Australia with the principal catalyst most likely the increased turnover in developed Asian markets during the quarter. ITG s Indicator is a measure that combines turnover, spreads and volatility. It was launched in 2008 with a notional value of 1,000. The data used in this article has been supplied to The Trade Asia by ITG s Asia Pacific research group and forms part of regular monthly research provided by ITG to their clients. It is not to be used, reproduced or retransmitted without permission. For information on this analysis or for further custom Asian microstructure research, please contact info@itg.com. The data was prepared for general information only and not as advice to or for any particular person or entity. Although every attempt has been made to verify the accuracy of the information contained herein, any and all liability for any errors or omissions is specifically excluded by each member of the ITG group of companies and their employees and agents. 2010 Investment Technology Group, Inc. All rights reserved. Busy markets and active buying programmes have galvanised market liquidity In January 2012, the Indicator stood at 1,069 and the high levels experienced in both the first quarter of 2012 and 2011 gave grounds for optimism. Since then, liquidity has fallen in Asian markets and in the remainder of both years, the Indicator recorded reduced levels, but 2013 may buck this trend. This year, the second quarter has not displayed the same fall-away effect and therefore the year-todate gives preliminary signs of being better than 2011 and 2012, if June continues the trend set by April and May. Trading costs have gone up in the first quarter and it 96 THE TRADE ASIA ISSUE 15 APR JUN 2013 www.thetradenews.com has become more expensive to execute in Asia. Trending up Seasonal impacts must be factored into transactional data, for example, there is a perceived tendency of the buy-side to weight asset purchases toward the early part of the year, and Q4 is often a quieter three-month period assuming the buyside has achieved target returns. Conversely, if institutional investors have not achieved satisfactory returns, the last quarter is often hectic. In the first quarter of 2013, in every major Asian market except for Singapore, trading costs were slightly higher than In all Asian markets except Singapore, trading costs were higher than year-on-year comparisons with 2012 and 2011.
Liquidity and Broker trading execution costs LIQUIDITY BAROMETER SOURCES The liquidity ranking is taken from an aggregate of key indicators outlined in this report with a particular focus on turnover and spreads, weighted across six key Asia Pacific markets (Japan, Australia, Hong Kong, Singapore, Korea and Taiwan). It is a relative indicator, designed to illustrate at a high level the market conditions for trading in Asia Pacific, and is based on detailed quantitative analysis of a broad data set. Q2 2011-Q1 2013 ITG S ASIA PACIFIC LIQUIDITY BAROMETER 1,400 1,0 1,200 1,100 1,000 900 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Feb-13 Mar-13 year-on-year comparisons with 2012 and 2011, but were broadly in line with first quarter patterns. All markets trading costs have spiked since the last quarter of 2012. In Japan, there appears to be a sustained, uninterrupted upward trend in trading costs that has extended for the last two years. In the first quarter of 2011, it was 37 bps, rising to 38 bps for the same period in 2012. This year the cost during the first quarter is 44 bps. The reason for the increase this year may be attributed to investors trying to get into the rising market in Japan, which chased up trading costs. The blended average across Asia was 45 bps for the first quarter of 2013, compared to 41 bps for the first quarter of 2012. Q2 2011-Q1 2013 TRANSACTION COSTS BY COUNTRY bps 70 60 50 40 20 Q2 2011 Q3 2011 Taiwan Australia Q4 2011 Q1 2012 Hong Kong Japan Q2 2012 Q3 2012 Q2 2011-Q1 2013 TRANSACTION COSTS PAN ASIA bps 60 50 40 Q4 2012 Q1 2013 Singapore South Korea Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Feb-13 Mar-13 THE TRADE ASIA ISSUE 15 APR JUN 2013 www.thetradenews.com 97
Spreads and turnover Q2 2012-Q1 2013 AVERAGE SPREADS 80 bps bps 60 40 25 Singapore Australia Hong Kong Japan South Korea Taiwan 20 Mar-12 Apr-12 May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Feb-13 Mar-13 There were higher volumes in virtually all major Asian markets during the first quarter of 2013. Japan, where market buoyancy stood out in terms of relative performance, averaged US$15-16 billion per day in turnover a mere eight months ago. But that figure has nearly doubled to US$26-27 billion. Other key markets have recorded upward volumes, but without emulating Japan s trend. Hong Kong has made the most noticeable progress, moving Land of the rising sun Soaring Japanese performance led the region s increased volumes upwards from US$4 billion per day a year ago to over US$6 billion per day by the end of March. However South Korea has bucked this trend and since summer 2012 has sustained spiraling trading volumes. This is a sign of a reverse correlation with 98 THE TRADE ASIA ISSUE 15 APR JUN 2013 www.thetradenews.com Japan, likely linked to the two countries interplay within their industrial sectors. When Japan devalues its currency, South Korea is often hit, as its corporations compete in the same kind of export products. The higher market liquidity in the first quarter
Spreads and turnover Q2 2012-Q1 2013 AVERAGE DAILY TRADED VOLUME US$ billions US$ billions 20 10 8 7 6 5 4 3 2 1 Japan Australia Hong Kong Singapore South Korea Taiwan 0 Mar-12 Apr-12 May-12 Jun-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Feb-13 Mar-13 has led to greater price discovery, and a consequence of that has been the lower spreads recorded during the first quarter. Spreading bets In Japan, spreads fell throughout the first quarter. Starting the year at 24 bps, spreads stood at 22 bps by the end of March the lowest level experienced there during the last 12 months. In the latter part of 2012, spreads had started to rise in Hong Kong, moving up from 26 to 27 bps. However, Higher market liquidity in the first quarter led to greater price discovery and lower spreads. that trend has reversed this year and spreads are a shade over 25bps. There has been liquidity and flow on both sides in Asian markets, rather than one-way trading. The effect of that trading is to compress spreads. In a market which is going exclusively in one direction, up or down, spreads tend to widen. Another reason why spreads have reduced is because this year, the spike in volumes in Asia has occurred in high capitalisation stocks, driven by investment from institutions outside the region, and these types of stocks are usually traded with the accompaniment of smaller spreads. THE TRADE ASIA ISSUE 15 APR JUN 2013 www.thetradenews.com 99
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