ETF growth to drive Asia program trading: Credit Suisse

The growing use of exchange traded funds as a way to gain access to Asian markets, and heavier activity around index rebalancing is driving growth in program trading in the region according to a report published by Credit Suisse Group AG.

The steady rise in assets being allocated to emerging markets, particularly by passive investors through index tracking funds and ETFs, has led to an uptick in program trading activity in Asia, even while overall volumes on stock exchanges have largely remained sluggish.

Program trading refers to the buying and selling of a basket of shares as a single security, allowing fund managers a more efficient means of getting in or out of several stocks.

ETFs, which track benchmark indexes often offer cheaper and less complicated access to many of Asia's stock markets than derivatives and have seen a sharp uptick in interest.

According to BlackRock Inc, owner of iShares and the world's largest asset manager, assets under management in Asia ex-Japan ETFs grew to USD 61.2 billion by the end June, up 15% since the start of the year, compared with a 10% rise globally.

"Money coming into the access markets in the region such as India, Korea and Taiwan is doing so via ETFs and access products, which has presented pretty good growth opportunities for program trading," said Khaleel Mohideen, a managing director at Credit Suisse who oversees program trading operations.

A quarter of Credit Suisse's total client flow in Asia was via program trading, the bank said in the report.

According to a Greenwich Associates survey published earlier this year, CLSA shared top ranking with Credit Suisse in terms of market share in 2010 among brokers trading Asian equities with institutions in the region.

ETFs rising

With ETFs still comprising less than 2% of the region's daily market activity compared with almost 40% in the United States, however, there is room to grow.

A key aspect of ETFs is that their liquidity depends on the constituent stocks rather than the volumes of the ETF itself. As long as the stocks comprising the ETF are actively traded, banks are able to deliver the baskets to funds.

"Even if on-exchange liquidity might not be great there is considerable activity around creation and redemption of ETFs and that's driving a lot of this volume coming through program trading desks." said Mohideen.

Another driver for the growth in trading baskets is portfolio positioning.

Investment managers have struggled this year as a lack of a sustainable trend has hurt performance, and the relatively bullish start to equity markets this year came undone as a debt crisis in Europe worsened, US growth floundered and inflation in Asia hit appetite for stocks.

The latest shuffle in strategy came as heightened volatility last month saw institutions accelerate their switch out of sectors most geared to the economy and into safer sectors such as utilities.

"We didn't see clients panicking or facing redemptions like in 2008. What happened was that a lot of our clients were transitioning into more defensive plays. So there was a lot of rotational switching and rebalancing of stock portfolios through baskets that we saw coming through," said Mohideen.

The chronic challenge of finding liquidity in Asia remains and underscores the uphill task faced by banks looking to expand regional cash equities businesses and are yet to offer advanced execution services or establish a presence in all markets.

"The key is liquidity and that's one of the biggest challenges. In the US, you have one big market. In Asia, you've got more than 11 markets with complex market-structure and nuances," said Mohideen.