Electronic trading in Asia: Current and future trends

As electronic trading transforms Asia’s financial landscape, how can sell-side firms navigate the complex regulatory environment and fragmented markets to fully realize the potential of automation, aggregators, and data-driven strategies? 

A straw poll at the APAC Sell-Side Forum, hosted by Bloomberg in Singapore in October, 2024, 47% of participants predicted a higher adoption of electronification in Asian local currency bonds, while 38% expected an increase in FX e-trading for emerging market currencies.  

With the potential of automation, algorithmic trading, and aggregators, what are the prospects for further growth in electronic trading across Asia? And how can sell-side institutions strategically harness these advancements to serve their clients better? 

The growing role of automation in Asian markets

Firstly, let’s examine the current state and technological advancements in electronic trading in Asia. Key trends include:

• Shift from voice to electronic platforms with aggregators: Despite the rise of electronic platforms and aggregators in Asia, much trading still occurs via voice, mainly where brokers play a key intermediary role. In fragmented markets, transitioning to aggregators and platforms offers a pathway to operational efficiency, with electronic interfaces helping firms centralize pricing, reduce trade costs, and streamline workflows. For banks and brokers previously dependent on voice-based transactions, adopting electronic trading systems and aggregators allows for real-time insights and improved risk management, closing long-standing operational gaps in these markets. 

• Algorithmic trading for FX and fixed income: Algorithmic trading is increasingly employed for FX and fixed income in Asia’s emerging markets, where auto-pricing of non-deliverable forwards (NDFs) and smart order routing have transformed trade execution. These advancements allow liquidity providers to manage spreads dynamically, match trades in fragmented pools, and efficiently handle high trade volumes. For sell-side institutions, algorithmic tools are especially significant in markets with lower liquidity, offering continuous pricing advancements that improve profitability and overall trading efficiency.

• Data-driven decision-making and advanced workflow automation: Sell-side firms in Asia are increasingly using data-driven dealer selection models to improve transparency and boost workflow efficiency. Incorporating metrics such as hit-miss ratios, dealer response times, and pricing accuracy, these automated workflows allow for more precise performance tracking and strategy adjustments. The use of data-driven automation across workflows reduces manual inputs, which lowers operational risk and optimizes resource allocation for trading institutions. This strategic shift towards automation and data analytics is essential for maintaining a competitive edge in rapidly evolving markets. 

• Improved transparency and liquidity through automation: Automation in trading workflows improves transparency and liquidity in Asian markets, driving greater market participation. Features like indicative pricing streams, auto-quoting, and straight-through processing (STP) enable deeper market engagement and improve price discovery. STP and auto-reporting reduce the need for manual confirmations, expediting trade settlement and delivering significant cost savings. Automated systems help sell-side participants manage larger trade volumes and react to market shifts with speed and accuracy. 

• Role of non-bank liquidity providers and all-to-all platforms: The presence of non-bank liquidity providers is expanding in APAC credit markets, supported by all-to-all platforms. This development allows non-bank entities to interact directly with traditional sell-side and buy-side participants, broadening liquidity pools, and facilitating dynamic pricing models. Through all-to-all platforms, non-bank liquidity providers can bypass traditional barriers, adding a layer of flexibility and diversity to credit market trading. 

Looking ahead

Given the advancements in electronic trading, what are the most significant operational and regulatory obstacles for sell-side firms navigating Asia’s diverse regulatory landscape? 

• Complex regulatory requirements in South Korea and India: In South Korea, where treasury bonds now support automation, foreign investors have had to provide IRC (investor registration certificate) numbers that sell-side traders then validate, often on multiple chats, before quoting a price. Such requirements introduce additional complexity, although recent workflow improvements that allow banks to auto-check IRC numbers against their internal system, are beginning to streamline this process. Indian Government Bond market is similarly challenging, where mandatory Securities and Exchange Board of India (SEBI) registration numbers and Clearing Corporation of India Limited (CCIL) reporting within 15 minutes place high demands on trade compliance. Sell-side participants also require local custodian IDs and negotiated dealing system – order matching (NDS-OM) IDs, with any approved electronic trading platform (ETP) license potentially easing these regulatory burdens and accelerating electronic adoption.

• Challenges with electronification of emerging markets local currency bonds and currencies: South Korea’s automation of treasury bond trading via auto-execution and auto-reporting highlights the progress in local currency bond markets. Meanwhile, India’s anticipated ETP license for local currency bonds signals a significant opportunity for electronification.These developments set a foundation for other emerging markets to adopt electronic trading, potentially unlocking new liquidity sources and standardizing trading environments. These moves offer sell-side firms a pathway to scale trading across more EM bonds. However, adopting electronification in high-yield markets remains challenging due to strict regulatory frameworks and execution requirements. 

• Expansion of non-bank liquidity providers’ role: Platforms like Bloomberg Bridge offer non-bank liquidity providers improved access to APAC’s credit markets, enabling them to operate request-for-quote (RFQ) workflows and engage directly with market participants. Integrating RFQ workflows adds depth to credit execution strategies, supporting a broader spectrum of liquidity options. For traditional banks, this shift introduces diversified liquidity pools, improving overall market robustness and offering sell-side firms alternative channels for liquidity provisioning.

• Market consolidation and growing specialization within the sell-side: As technology and operational demands increase, consolidation is likely in Asia’s trading ecosystem, where only highly adaptable firms will thrive. Specialization within sell-side roles is anticipated, with certain institutions focusing on complex, high-touch trades and others targeting optimized electronic channels. This shift is expected to redefine roles, with electronic trading heads managing data-driven clients and volatility portfolio managers focusing on high-touch client needs. The convergence of scale and specialization will drive innovation for the sell side, leading to a more efficient and streamlined market structure.

• Emerging AI-driven algorithms and risk management tools: AI-based tools are growing relevant for managing high-volume trades. For instance, server-side time-weighted average price (TWAP) algorithms enable the automatic slicing of large orders, matching available liquidity precisely. In fixed income, where risk rotation times are longer, these AI-driven tools improve liquidity management and execution quality. The adoption of server-side TWAP allows sell-side institutions to meet client needs for larger orders and manage the liquidity intricacies unique to lower-frequency markets. The growing use of such tools among sell-side firms points to a future where AI continues to improve trading precision in complex market environments. 

As electronic trading expands, sell-side firms in Asia face a complex mix of opportunities and regulatory challenges. While automation, algorithmic strategies, and aggregators reshape capabilities, compliance and market-specific demands require a tailored approach. Future growth will depend on sell-side institutions’ ability to integrate these innovations, strategically manage liquidity, and address Asia’s diverse regulatory landscapes in emerging markets. 

Insights in this article are based on the “Innovation in Electronic Trading” panel which was part of the Bloomberg APAC Sell-Side Forum held in Singapore in October 2024.