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KVH Whitepaper: Trading in Asia


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The Key Challenges for International HFT Firms and How to Overcome Them

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KVH Whitepaper: Trading in Asia

  1. 1. WHITE PAPER: KVH Financial Solutions Trading in Asia The Key Challenges for International HFT Firms and How to Overcome Them Table of Contents 2 Introduction 2 Trading in Asia: Challenges 3 Language Barriers 3 Ownership of Infrastructure Assets and Tax Implications 3 Colocation Rules of Engagement 4 Setup and Operation Costs 4 Staying in Touch with a Rapidly Changing Environment 5 Conclusion 6 About KVH Copyright© 2012 by KVH Co. LTD All Rights Reserved. Not to be copied or reproduced without express permission of KVH Co LTD Page 1 of 6
  2. 2. Trading in AsiaIntroduction bespoke rules of engagement at exchanges and other market venues, different marketThe opportunities in Asia speak for themselves. microstructures and languages, as well as havingChina is the second largest and fastest growing to decide which technologies best suit eacheconomy, Japan is the third largest economy and particular environment and which servicethe second largest IT market, Korea is Asia’s largest providers will best provide the needed supportderivative market by trading volume, India is services.growing exponentially and expected to overtakeChina as the largest economy by 2014 , and Hong This whitepaper aims to outline and explain someKong is China’s international financial center and of the key challenges HFT firms face when enteringkey link to the global market. In February 2012, the Asian financial markets, and how to overcomeoverall trading in Asian financial markets grew to them to succeed in Asia.US$1.58 trillion.Many US and Europe-based Trading firms view Trading in Asia: ChallengesAsia as a relatively new market where theopportunities are boundless. Regulatory changes Trading in multiple markets across Asiaacross the region are creating environments involves the complexities of understandingconducive to the business strategies of High each market microstructure and how to bestFrequency Trading (HFT) firms. Tapping into the capitalize on their opportunities. ForAsian markets would enable traders to access buy-side/sell-side, brokers, dealers, and othernew liquidity pools, allowing them to escape the players in the financial industry, issues relatedfierce competition and tight margins of the US and to business areas beyond their coreEuropean markets. Furthermore, as the world competencies can potentially introducemarkets are becoming more interlinked, adding prohibitive costs and delay the time to market.access to the liquidity pools in Asia would create These issues include IT infrastructureopportunities for global arbitrage and essentially management and operations,broaden trading firm’s scope for increasing documentation translation, administrationrevenues. and communication with the Asian exchanges and other venues, and aHowever, US and European Trading firms still find it bewildering spectrum of rules of engagementhard to justify their entry into Asia because of the from the hosting service providers. Below is anvarious challenges that come with trading in this outline of how trading firms can address theunique market. These challenges include various challenges encountered in the Asianmanaging different legal and tax regulations, markets, and effectively capitalize on the opportunities they offer. Copyright© 2011 by KVH Co., Ltd. All Rights Reserved Page 2 of 6
  3. 3. Trading in Asia local language to enable smoothLanguage Barriers communication between you and the local vendors, brokers, and market operators.Language is the most common and obviousbarrier for foreign investors looking to trade inAsia. Traders are often hit with this reality once Ownership of Infrastructurethey realize that in countries where English isnot an official language, most, if not all, Assets and Tax Implicationsnotifications from the market operators arenot available in English. Similarly, when Regulations regarding infrastructure andworking with service providers in such product ownership in Asia differ greatly fromcountries, trading firms can use up significant those of the US and European markets.time and resources resolving relatively simple Having a strong understanding andissues when a US-based trader who has to consideration of these regulations with awork with a local engineer based in Tokyo, service provider could help avoid tax issuesSeoul, or Shanghai speaks limited or no English for foreign trading all. In the fast-paced trading industry, thesetime-consuming bumps in the road are not a For example, you need to carefully assess theluxury that can be afforded. existence of “Permanent Establishment” in light of Japan National Tax Agencys rules.If trading in such markets, trading firms must Having a local business partner, experts orensure that the service providers they use vendor that is familiar with the appropriatehave multilingual capabilities at all levels of rules or one that could alternatively supplythe service stack. Rather than merely working local infrastructure to help avoid anywith a bilingual salesperson that speaks potential complications, would enable aEnglish and the native language, ensure the smooth entry into the Japanese market.service provider’s service desk, operationsteam, and line of management also have Colocation Rules ofbilingual abilities for cases when issues areescalated and clarity of communication is Engagementmost important. Ideally, your service providerwill also offer multilingual capabilities as part Every Exchange/Market Operator with aof their facilitation services to guide you colocation or proximity venue has differentthrough any documentation, terminology, or rules governing the use of their services.necessary procedures that take place in the Understanding what these rules are and how Copyright© 2011 by KVH Co., Ltd. All Rights Reserved Page 3 of 6
  4. 4. Trading in Asiato effectively navigate the obstacles is critical A key component of cost-efficient trading infor any non-member trading firms. At present, Asia is leveraging the right infrastructure andsome Asian exchanges restrict which parties network service provider that can address thecan contract for space in their colocation or trading firm’s specific business needs. For HFTs,proximity locations. There are also various rules a highly secure and reliable ultra low latencyon what outbound connections can be network that spans across Asia and withmade from colocation space provisioned access PoPs in the key target markets is thefrom the exchanges. basic building block. A service provider that can package the entire infrastructure valueTo capitalize on exchange colocation stack, including network solutions, dataenvironments, leverage a reliable service center services together with remote hands,provider that offers customized and project management and facilitation services,integrated solutions. KVH currently has a will lower the total cost of ownership whilepartnership agreement with multiple allowing the HFT to concentrate on its coreexchanges, including TSE and Kosccom (ICT competency in trading of KRX), to provide their colocation Furthermore, the financial ecosystem thatand proximity hosting services and allow derives from the network provider’s alreadyaccess for potential market players to a connected financial firms will offer the HFTbroker neutral environment in those trading making entry into the Asian markets a widervenues. KVH’s ultra low latency Ethernet range of options to seamlessly integrate thedelivery platform has also been adopted for elements of their trading infrastructurelocal and global exchange connectivity to platform. This shortens time to market andenable the delivery of complete service lowers setup costs.offerings to any type of trading firm. Staying in Touch with a RapidlySetup and Operational Costs Changing EnvironmentFor HFT firms, setting up and operatingcolocation or proximity infrastructure in Asia Asian capital markets are still evolving andcan consume a lot of time and resources that doing so very quickly. In each Asiancould otherwise be allocated to addressing jurisdiction, the regulators are trying to adapttheir core business of trading. The associated their rules to the increasingly global make upcomplexities will translate into increased costs, of both the financial products and theoften deterring trading firms, particularly financial market participants. There aresmaller firms, from entering the market. Copyright© 2011 by KVH Co., Ltd. All Rights Reserved Page 4 of 6
  5. 5. Trading in Asiaincreasingly common reports of regulations developments in their domicile throughaddressing systemic risks, fostering newsletters and other forms of regularcompetition and protecting ordinary retail updates.investors. The accessibility and supportabilityof advanced new technologies is also Conclusionchanging the landscape as US and Europeantechnology firms build out their footprints in Asia’s expanding and rapidly evolving capitalthe region. Although the above markets offer trading firms across the globe adevelopments may make news headlines in broad range of opportunities. However, theretheir respective countries, they hardly get a are many challenges created by the diversemention in the US or European media where market structures, regulations, language andthe foreign HFT firms are domiciled. cultures, trading behaviors, and access toMarket-shifting developments may be missed, technology across the Asia Pacific markets.potentially leading to a hitherto With diligent evaluation and the right localmarket-leading HFT falling behind its service providers to handle the localcompetitors. It is therefore important that the complexities, US and European trading firmsservice providers that an HFT firm partners with can successfully and cost effectively be partprovide a window into the industry of the Asian growth story. Copyright© 2011 by KVH Co., Ltd. All Rights Reserved Page 5 of 6
  6. 6. Trading in AsiaAbout KVHKVH is an Asia Pacific IT Services and Data Center Services Provider established in Japan. KVH’sInformation Delivery Platform delivers integrated cloud and network solutions and best-in-class service toits customers. KVH owns infrastructure and provides services that enable clients to store, process, protectand deliver their vital business information. KVH provides IT Services, Cloud Services, Data Center Services,Managed Network Services, and Professional Services.KVH has a presence in Tokyo, Yokohama, Osaka, Hong Kong, Shanghai, Singapore, Seoul/ Busan, andChicago, and serves over 1,900 customers in broad industry segments such as financial services,manufacturing, media, gaming, and e-commerce. More information on KVH can be found Copyright© 2011 by KVH Co., Ltd. All Rights Reserved Page 6 of 6