BlackRock Liquidity Worry Dogs Asia Currency Robot Trades

BlackRock Inc. says poor liquidity in electronic currency trading is a hurdle in Asia, while voice transactions are essential for Mitsubishi Corp., hampering the use of such platforms in a region trailing the global average.

BlackRock Asia Pacific, part of the world’s biggest money manager, says volumes help decide whether it uses an electronic or voice-based platform for currency transactions. Mitsubishi, Japan’s largest trading company, highlights the vulnerability of electronic systems to technological disruptions, recalling the value of voice trading during the unprecedented earthquake and tsunami that struck Japan in 2011.

Of 12 major Asian currencies, only two account for two percent or more each of foreign-exchange turnover, according to the Basel-based Bank for International Settlements. Data compiled by Greenwich Associates show electronic trading rose to 74 percent of global volume in 2013, from 71 percent the year before, while falling to 67 percent in Asia excluding Japan from 68 percent.

“There’s a concentration of the platform volume on more globalized currencies,” Paul Dowling, principal analyst at market-research firm East & Partners said by phone on March 27. “Those are currencies where the most dominant transaction volumes currently sit for these e-platforms. They’re not that good yet at delivering the same execution quality and pricing for some of the smaller currencies in the region.”

Varying demand for regional currencies from the Chinese yuan to the Sri Lankan and Pakistani rupees may pose a barrier for platform providers, the Sydney-based company’s Dowling said.

Market Share

The U.S. dollar was one side of 87 percent of trades in the $5.3 trillion a day foreign-exchange market in April 2013, followed by the euro at 33 percent, according to BIS’s most recent triennial survey published in December. After the yen’s 23 percent share, the next biggest contribution for an Asian currency was the yuan’s 2.2 percent, according to the figures.

“There are benefits of anonymity and straight-through-processing that an electronic platform provides,” Sam Kim, the Hong Kong-based head of the Asia Pacific trading and liquidity strategies group at BlackRock, wrote in an e-mailed response to questions on March 24. “However, in many markets in Asia, there is not sufficient liquidity on the electronic trading platforms.”

Currency transactions driven by import and export business flows, rather than speculative trading, dominate foreign-exchange activity in Asia, according to East & Partners’ Dowling.

Voice Essential

While Tokyo-based Mitsubishi, Japan’s biggest importer of coal and liquefied natural gas, uses electronic trading it still considers voice trading “essential,” particularly in times of emergency, the company said in an e-mailed response to questions on March 31.

One such instance cited by Mitsubishi was the earthquake and tsunami in Japan in March 2011, which drove an 8.6 percent drop in the Topix index of shares for the month and sent the yen tumbling 1.6 percent against the dollar.

Mitsui & Co., Japan’s second-largest trading company, sees efficiency as an advantage of electronic platforms. The costs of integrating technology as well as maintaining and securing the system, could present a challenge, the company said in an e-mailed response to questions on March 28.

A “very wide price, or sometimes no price” for foreign-exchange trades is also an issue with electronic solutions when markets are “stormy,” Mitsui said.

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region’s 10 most-active currencies, has fallen 0.7 percent this year to 115.20 as of 2:17 p.m. in Singapore. It closed on April 1 at the highest level in three weeks, recovering from a half-year low on March 20.

Changing Regulation

For platform providers such as London-based MarketPrizm, gaining market share will be a question of improving access to liquidity in a market with numerous participants.

“When technology improves to enable you to be closer to that liquidity, and process the pricing quicker, then there tends to be a shift in the market towards that,” Jay Hibbin, commercial director at MarketPrizm, said in an interview in Tokyo on March 28.

The global foreign-exchange market has been slower to replace human traders with machines than other sectors such as equities because most trading takes place away from exchanges. Without a central repository showing the flow of completed orders, market participants piece together information about the direction of rates from traders and salesmen. Bloomberg News first reported in June that some traders allegedly colluded with counterparts at other banks to manipulate benchmark currency rates. At least a dozen authorities on three continents are examining the allegations.

“We believe that many asset classes will move more and more to an equity-like market structure due to changing regulations and their impact on market players,” BlackRock’s Kim said. “This evolution in market structure will lead to more efficient trading as well as better transparency into trading costs for our clients.”

-- With assistance from Kevin Buckland in Tokyo.

(Updates Asian currency performance in 13th paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE