kvh whitepaper: trading in asia

Copyright© 2012 by KVH Co. LTD

All Rights Reserved. Not to be copied or reproduced without express permission of KVH Co LTD

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Trading in Asia

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

WHITE PAPER: KVH Financial Solutions

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

Trading in Asia

Copyright© 2011 by KVH Co., Ltd. All Rights Reserved

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Introduction

The opportunities in Asia speak for themselves.

China is the second largest and fastest growing

economy, Japan is the third largest economy and

the second largest IT market, Korea is Asia’s largest

derivative market by trading volume, India is

growing exponentially and expected to overtake

China as the largest economy by 2014 , and Hong

Kong is China’s international financial center and

key link to the global market. In February 2012,

overall trading in Asian financial markets grew to

US$1.58 trillion.

Many US and Europe-based Trading firms view

Asia as a relatively new market where the

opportunities are boundless. Regulatory changes

across the region are creating environments

conducive to the business strategies of High

Frequency Trading (HFT) firms. Tapping into the

Asian markets would enable traders to access

new liquidity pools, allowing them to escape the

fierce competition and tight margins of the US and

European markets. Furthermore, as the world

markets are becoming more interlinked, adding

access to the liquidity pools in Asia would create

opportunities for global arbitrage and essentially

broaden trading firm’s scope for increasing

revenues.

However, US and European Trading firms still find it

hard to justify their entry into Asia because of the

various challenges that come with trading in this

unique market. These challenges include

managing different legal and tax regulations,

bespoke rules of engagement at exchanges and

other market venues, different market

microstructures and languages, as well as having

to decide which technologies best suit each

particular environment and which service

providers will best provide the needed support

services.

This whitepaper aims to outline and explain some

of the key challenges HFT firms face when entering

the Asian financial markets, and how to overcome

them to succeed in Asia.

Trading in Asia: Challenges

Trading in multiple markets across Asia

involves the complexities of understanding

each market microstructure and how to best

capitalize on their opportunities. For

buy-side/sell-side, brokers, dealers, and other

players in the financial industry, issues related

to business areas beyond their core

competencies can potentially introduce

prohibitive costs and delay the time to market.

These issues include IT infrastructure

management and operations,

documentation translation, administration

and communication with the Asian

exchanges and other venues, and a

bewildering spectrum of rules of engagement

from the hosting service providers. Below is an

outline of how trading firms can address the

various challenges encountered in the Asian

markets, and effectively capitalize on the

opportunities they offer.

Trading in Asia


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Language Barriers

Language is the most common and obvious

barrier for foreign investors looking to trade in

Asia. Traders are often hit with this reality once

they realize that in countries where English is

not an official language, most, if not all,

notifications from the market operators are

not available in English. Similarly, when

working with service providers in such

countries, trading firms can use up significant

time and resources resolving relatively simple

issues when a US-based trader who has to

work with a local engineer based in Tokyo,

Seoul, or Shanghai speaks limited or no English

at all. In the fast-paced trading industry, these

time-consuming bumps in the road are not a

luxury that can be afforded.

If trading in such markets, trading firms must

ensure that the service providers they use

have multilingual capabilities at all levels of

the service stack. Rather than merely working

with a bilingual salesperson that speaks

English and the native language, ensure the

service provider’s service desk, operations

team, and line of management also have

bilingual abilities for cases when issues are

escalated and clarity of communication is

most important. Ideally, your service provider

will also offer multilingual capabilities as part

of their facilitation services to guide you

through any documentation, terminology, or

necessary procedures that take place in the

local language to enable smooth

communication between you and the local

vendors, brokers, and market operators.

Ownership of Infrastructure

Assets and Tax Implications

Regulations regarding infrastructure and

product ownership in Asia differ greatly from

those of the US and European markets.

Having a strong understanding and

consideration of these regulations with a

service provider could help avoid tax issues

for foreign trading firms.

For example, you need to carefully assess the

existence of “Permanent Establishment” in

light of Japan National Tax Agency's rules.

Having a local business partner, experts or

vendor that is familiar with the appropriate

rules or one that could alternatively supply

local infrastructure to help avoid any

potential complications, would enable a

smooth entry into the Japanese market.

Colocation Rules of

Engagement

Every Exchange/Market Operator with a

colocation or proximity venue has different

rules governing the use of their services.

Understanding what these rules are and how

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to effectively navigate the obstacles is critical

for any non-member trading firms. At present,

some Asian exchanges restrict which parties

can contract for space in their colocation or

proximity locations. There are also various rules

on what outbound connections can be

made from colocation space provisioned

from the exchanges.

To capitalize on exchange colocation

environments, leverage a reliable service

provider that offers customized and

integrated solutions. KVH currently has a

partnership agreement with multiple

exchanges, including TSE and Kosccom (ICT

company of KRX), to provide their colocation

and proximity hosting services and allow

access for potential market players to a

broker neutral environment in those trading

venues. KVH’s ultra low latency Ethernet

delivery platform has also been adopted for

local and global exchange connectivity to

enable the delivery of complete service

offerings to any type of trading firm.

Setup and Operational Costs

For HFT firms, setting up and operating

colocation or proximity infrastructure in Asia

can consume a lot of time and resources that

could otherwise be allocated to addressing

their core business of trading. The associated

complexities will translate into increased costs,

often deterring trading firms, particularly

smaller firms, from entering the market.

A key component of cost-efficient trading in

Asia is leveraging the right infrastructure and

network service provider that can address the

trading firm’s specific business needs. For HFTs,

a highly secure and reliable ultra low latency

network that spans across Asia and with

access PoPs in the key target markets is the

basic building block. A service provider that

can package the entire infrastructure value

stack, including network solutions, data

center services together with remote hands,

project management and facilitation services,

will lower the total cost of ownership while

allowing the HFT to concentrate on its core

competency in trading strategies.

Furthermore, the financial ecosystem that

derives from the network provider’s already

connected financial firms will offer the HFT

making entry into the Asian markets a wider

range of options to seamlessly integrate the

elements of their trading infrastructure

platform. This shortens time to market and

lowers setup costs.

Staying in Touch with a Rapidly

Changing Environment

Asian capital markets are still evolving and

doing so very quickly. In each Asian

jurisdiction, the regulators are trying to adapt

their rules to the increasingly global make up

of both the financial products and the

financial market participants. There are

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increasingly common reports of regulations

addressing systemic risks, fostering

competition and protecting ordinary retail

investors. The accessibility and supportability

of advanced new technologies is also

changing the landscape as US and European

technology firms build out their footprints in

the region. Although the above

developments may make news headlines in

their respective countries, they hardly get a

mention in the US or European media where

the foreign HFT firms are domiciled.

Market-shifting developments may be missed,

potentially leading to a hitherto

market-leading HFT falling behind its

competitors. It is therefore important that the

service providers that an HFT firm partners with

provide a window into the industry

developments in their domicile through

newsletters and other forms of regular

updates.

Conclusion

Asia’s expanding and rapidly evolving capital

markets offer trading firms across the globe a

broad range of opportunities. However, there

are many challenges created by the diverse

market structures, regulations, language and

cultures, trading behaviors, and access to

technology across the Asia Pacific markets.

With diligent evaluation and the right local

service providers to handle the local

complexities, US and European trading firms

can successfully and cost effectively be part

of the Asian growth story.

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About KVH

KVH is an Asia Pacific IT Services and Data Center Services Provider established in Japan. KVH’s

Information Delivery Platform delivers integrated cloud and network solutions and best-in-class service to

its customers. KVH owns infrastructure and provides services that enable clients to store, process, protect

and 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, and

Chicago, 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 at

www.kvh.co.jp/en/

kvh whitepaper: trading in asia

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