Launching in APAC: A Comparison of Major Exchanges

Asia-Pacific markets show enduring growth—total market capitalization increased by 20% and exchange-traded derivatives volume rose 29% in 2019. APAC accounts for 10% of global fund assets under management (AUM) and has attracted 25% net fund inflows for the past decade.

Improving market infrastructure across the region is enabling firms to tap into this growth. But it’s a fragmented market; each country offers different advantages and challenges. Knowing how and where to access APAC’s opportunities requires understanding the different national markets, how they compete, and how they might complement each other in an overall global strategy.

 The APAC region covers dozens of countries, but global firms tend to focus on regional powerhouses such as Japan, Hong Kong, and Australia and then expand to more complex emerging markets from there. No matter where in APAC a firm operates, its strategies will be affected by its largest market—China—whose partnerships and policies affect all its neighbors. APAC is a region in constant flux, and China is driving much of that change.

China is the Largest Market in APAC

China is the largest financial market in APAC, with USD 8.4 trillion in domestic market capitalization. Its two largest exchanges—the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE)—have been working since 2002 to attract outside investment, first through the Qualified Foreign Institutional Investor (QFII and RQFII) programs, then through the Stock Connects, which allow foreign investors to gain access to mainland China liquidity through other exchanges like the Hong Kong Exchange (HKEX) or the London Stock Exchange. Participants in the Stock Connects get access to A-shares of all SSE and SZSE-listed companies, but not derivatives products.

Shanghai and Shenzhen both have co-location data centers. However, their order-matching infrastructure currently does not support ultra-low latency trading. It’s been reported that HFT is “effectively absent” from the stock market in China.

Given these limitations, the simplest entry to the Chinese markets is through the Stock Connect relationship with HKEX. Hong Kong is one of the mature Asian markets that have smoothed the way for foreign investors. In the process, their exchanges have become global trading hubs.

Mature APAC Markets

Exchanges in Hong Kong, Japan, Singapore, and Australia have structured themselves to accommodate global investors through extended trading hours, strategic partnerships, and custom product offerings.

Hong Kong

In addition to its Stock Connect gateway to China, HKEX offers index and derivatives products that cover markets across Asia. With the largest share of cross-border AUM in APAC in 2019, HKEX is often the first footprint in Asia for global firms.

Trading in Hong Kong is supported by low-latency co-location options, as well as 16 dark pool operators, primarily banks’ and brokers’ internal crossing engines.

Hong Kong’s stamp duty on share transfers helps drive significant trading activity to derivatives, which are exempt. Still, its equity market surpassed Japan’s in 2019 as the third largest in the world, behind the US and China.

Japan

Japan’s financial market is led by the Japan Exchange Group’s (JPX) two major exchanges in Tokyo and Osaka, which together have more than USD 5.7 trillion in domestic market capitalization. Despite recent stagnant growth in the country’s capital markets, it’s well situated for global firms. Alternative trading venues such as Japannext and Chi-X provide opportunities for liquidity—particularly on their dark markets—and extended hours draw global interest.

JPX has worked with other exchanges to diversify its offerings, partnering with the Singapore Exchange (SGX) for derivative products and the Shanghai Stock Exchange for an ETF Connect.

Japanese authorities have stepped up regulation of high-frequency trading in recent years, requiring HFT firms to register, flag their low-latency trading orders, and follow risk management steps.

Singapore

Singapore, the smallest market in this tier, still plays a significant role thanks to SGX’s network of global relationships. Those partnerships have created a diverse set of investment instruments, such as index futures developed in concert with other Asian markets (including China) and a growing suite of commodities derivatives.

SGX requires that trading members limit off-exchange trades to large blocks (50,000+ shares or USD 105,790+), so trading in Singapore’s two dark pools only makes up about 8% of total volume.

SGX has the longest trading hours in Asia, with extended derivatives trading hours that overlap with Western markets. Singapore has worked in the last few years to build its position as an FX hub, offering incentives to banks and other liquidity providers to locate their forex trading platforms there.

Australia

Australia’s market is dominated by the Australian Securities Exchange (ASX), but the landscape has changed since 2008 with the introduction of Chi-X Australia (CXA), which trades all ASX-listed securities and offers unique products. Both exchanges have dark mid-point markets and many firms connect to both ASX and Chi-X to enhance best execution.

Also, the exchanges feed a national demand for investment products driven by Australia’s superannuation program, a retirement system requiring employer contributions of 9.25% of employee salaries.  As a result, Australia is now the fourth largest pension market in the world.

Australian exchanges are also a good place to access the much smaller New Zealand market. Many New Zealand companies dual-list on both ASX and New Zealand’s Exchange (NZX), and Kiwi companies make up about 2% of the ASX 200 and other market-cap based indices used in the creation of exchange-traded products (ETPs).

Once firms have established a presence in these mature APAC markets, they may consider branching out to other countries in the region: Asia’s emerging markets. “Emerging” doesn’t necessarily mean “small”—India alone has two of the top six APAC equities exchanges by domestic market cap and its National Stock Exchange (NSE) is the world’s largest derivatives trading venue.

But emerging markets may pose additional accessibility challenges to global firms, including openness to foreign investors and currency convertibility. One option for bypassing these challenges is by using national and regional indices.

Leveraging Indices to Access Emerging APAC Markets

Taiwanese, Indian, and South Korean exchanges have seen substantial growth in recent years, but entering these markets requires an understanding of their complex market and regulatory structures. As a result, many firms choose to gain first access through the countries’ popular indices. Derivatives and funds based on these indices can be traded on other APAC exchanges, providing additional sources of regional liquidity.

Derivatives based on the Indian NSE’s NIFTY index are the most heavily traded derivatives contracts in the world, and can be accessed on SGX, while NIFTY-based ETFs are available in Japan and Australia. HKEX provides access to ETFs based on the BSE’s SENSEX.

Futures based on the Taiwan Stock Exchange (TWSE)’s TAIEX are available through the JPX, while the Korea Exchange (KRX)’s KOSPI is the underlier to ETPs on the HKEX and JPX. (KRX has an agreement with Eurex for KOSPI-based derivatives).

Regional indices such as the FTSE ASEAN 40 can give firms access to countries in Southeast Asia, including Thailand, Indonesia, Malaysia, and the Philippines. The Dow Jones Emerging ASEAN Titans 100 includes those four countries plus the smaller Vietnam market.

Forecasts suggest that APAC will lead the world in growth of capital market activity over the next few decades. Firms drawn to this potential have many choices for points of access—the mature, Western-friendly markets; the fast-growing, complex markets; and the enormously influential Chinese market.

Matching the strengths of these APAC players to a firm’s strategies requires careful consideration, and the flexibility to change as the markets—and your plans—evolve.