In the integrated world of today, it would be baseless to assume that the Western economies are the only drivers of financial markets. Asian markets have garnered importance not only for traders in Asia but also influences the global financial markets. With an ever-increasing population and the largest geographical area, Asian markets have slowly but surely usurped power from the Western economies and created a niche market of their own. Due to the focus on round-the-clock trading, the emergence of global risks echoes almost immediately throughout our intertwined world. Trading volumes have continued to grow during Asian trading hours for not only Asian market participants but also global participants.
Lowering Trading Costs
In financial terms, trading costs, also known as transaction costs, include both the commission and the spreads i.e. the difference between the bids and ask prices when initiating any transactions among others. Lower the trading costs, higher the possibility of traders entering the market eco-system. In the Asian region, trading costs are seemingly higher than in other regions of the world. This inevitably impacts investor returns. In emerging markets like China, Indonesia and Thailand, trading costs are still high. However, the tide has turned for the better as developed markets of Australia, Hong Kong and Japan have witnessed trading costs converging with the US.
The major factor behind high trading costs is due to the heterogeneous nature of the market resulting in a greater need for research and advisory services. The move to untie can likely cut transaction costs and through electronic trading, the much-fancied price discovery mechanism can surface at lower commission rates. According to the CME Group, Asian markets have witnessed a jump in the use of electronic trading platforms, accounting for 99% of the daily volume. Access to liquid markets where spreads are tighter, costs are lower, and liquidity is deeper has enabled small traders to trade at comparatively lower costs. Traders have also been able to incorporate risk management tools to manage and respond to an inclining number of risks on real-time basis.
Hedging Tools
A trader in a futures market is also exposed to numerous hedging tools, becoming advantageous particularly in periods of uncertainty and volatility. The attractiveness of this market lies in the high levels of transparency, liquidity and diversification for traders looking beyond the traditional bond and equity instruments. Likewise, trading in the futures markets offers access to various lists of asset classes ranging from interest rates, equity indexes, foreign exchange and commodities. It is a dominant diversification tool as most of these assets display very little to no correlation to the bond and equity markets while remaining highly liquid.
Inclining Trading Volume
The rise in the trading volume from the Asian region has been derived from the growing influence from the region accounting for 60% of the global economic growth. According to the CME Group, in 2017, the average daily volume (ADV) from Asia-Pacific based traders was 664,000 contracts, a 5% year-on-year increase. The major drivers were interest rates, foreign exchange and metals products. The ADV for futures and options contracts traded in the CME Group exchanges during the Asian trading hours culminated with 2.2 million contracts-a 3-year compound annual growth rate of 9%.
The growing numbers support the notion that the Asian trading hours have attained a critical mass with market participants no longer disadvantaged that they are trading outside the ‘standard’ trading hours of the European and the US markets. In hindsight, Asian trading hours have benefitted market participants. When the result of BREXIT was making the rounds in the wee hours of June 24, 2016, the only markets open were Asian markets. Out of the total 44 million contracts traded globally that day, 40% contracts were transacted during Asian hours. Recently, when Dow Jones plunged close to 5% overnight on February 6, 2018, the markets observed around 11 million contracts traded on the CME Group platforms during Asian trading hours.
What next?
With the world on the path of increasing connectivity, global events from any nook and corner of the world can have resulting effects on the other side of the globe. Split-second decisions of traders are important as events unfold. The ability to trade around the clock is an added feature which most exchanges are trying to offer to demanding clients. Market participants can react and profit when such events occur outside the European and the US time zones. Market pundits have predicted that the Asian markets will continue to garner more influence as we step into the age of global connectivity with added impetus.
Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected]
