I am on my way home from the CLSA Investors Forum in Hong Kong, and, after a week in Asia, the only thing I can think of is how egocentric I am. While I knew Asia existed, I never really understood the whole Asian experience, and the trip has left me floored. By Asia, I don't mean just Tokyo. I am talking about Hong Kong, China, Korea, Taiwan, India, Singapore and other former high-flying Asian Tiger economies.
Now, I am the first to admit that I look at the world through U.S. lenses (literally and figuratively). However, I am not all that parochial; I have been around - a lot (just ask my family). But nowhere have I gotten the feeling that so much opportunity is within grasp as in Asia, where I found growth rates that make the U.S. look recessionary, a developing financial market that is increasingly more sophisticated, economies that are business-friendly, a culture that strives for wealth, an aging population that knows how to save and a younger population that can spend faster than Paris Hilton on Rodeo Drive.
But, as brokers and investors look to take advantage of this environment, things may not be as easy as they seem. Asia, for the most part, is 10 or 12 separate economies with very different capital markets structures and market regulations. Korea has vast liquidity and the economy is on the rise. But I am told the locals have insight into most order flow, and when an outside quote is posted, they are all over it. Monetary policy in Singapore is making investing problematic. Japan, after 10 or more years of stagnant growth, is picking up steam. While India's growth is great, getting connectivity into its markets is difficult, and settlement can be a nightmare. And then there's China, Thailand, Hong Kong, etc.
This has vast implications for the many brokers, investment managers and hedge funds looking to expand outside low-yielding, more-traditional Western markets. But, if investors were uncomfortable with U.S. market structure, what will happen when locals start bidding up less-liquid stocks in an emerging market? As bulge-bracket brokers reposition their trading algorithms for new markets, how will they perform? Will they get picked off? Will algorithms properly function under emerging markets' liquidity profiles? These questions are important to consider as firms begin expanding their horizons.
So how should firms get involved? Well, first, start small. Understand the economies and trading markets. Pick several. Have people you trust on the ground. Know the regulations and have brokers that not only understand the investments, but also have local knowledge.
As you begin trading, understand that electronic trading, direct market access (DMA) and algorithms are novel for most of these markets. Even FIX connectivity outside of Japan and Australia is limited. As DMA technologies are deployed, start small. Begin routing small order flow through these platforms, leveraging more hands-on technologies, like DMA, rather than passive ones, such as trading algorithms. While using algorithms may be the answer to reducing market impact and finding hidden liquidity, I would be more confident of hitting a bid in an open order book than asking an algorithm to accurately model a thinly traded stock in an emerging market 10,000 miles away.
That said, these markets are getting hot. Stocks such as Samsung and Hyundai in Korea, and Lenovo in China are becoming global brands. However, these brands will be challenged in attracting direct U.S. investment as Sarbanes-Oxley has made it difficult for foreign companies to list in the U.S. So as U.S. investment goes direct to the local market, we should be prepared for the emergence of the East as a new market center.
But before we can capitalize on these trends, we need to move ahead cautiously. We need to do our due diligence, understand the technologies, and objectively analyze opportunities and challenges. While this trip opened my eyes, I would want to make sure I knew the landscape before opening my wallet and investing.
Larry Tabb is founder and CEO of Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm. [email protected]
On The Net
Larry Tabb is the founder and CEO of TABB Group, the financial markets' research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the interview-based research methodology of "first-person knowledge" he developed, TABB Group ... View Full Bio