Posted by Giles Nelson
Beijing was the last stop on my three city Asian tour and, from a personal perspective, the most exciting one as I’d never visited mainland China before.
China’s seemingly inexorable economic rise has been well documented. In the last 20 years, China’s GDP growth has averaged over 9%. As I travelled from the airport into Beijing’s central business district I saw few older buildings. Virtually everything, including the roads, looked as if it had been built in the last 10 years.
The Chinese stock market is big. In terms of the total number of dollars traded, the combined size of the two stock exchanges, Shanghai and Shenzhen, is approximately double that traded in the next biggest Asian market, Japan. The increase in stock trading has been very rapid. Trading volumes on Shanghai and Shenzhen have risen by approximately 20 fold in the past 5 years, although there has been significant volatility in this rise.
The domestic algorithmic trading market is nascent. Currently, intra-day trading in company shares is not allowed. It is the recently established futures markets therefore where algorithmic and high-frequency trading are taking place. No figures exist on the proportion of trading done algorithmically in China currently, but I’m going to estimate it at 5%.
I was in Beijing to participate in the first capital markets event Progress has held there. Although Shanghai is the finance capital of China, we chose to hold the event in Beijing to follow up on previous work we'd done there. In the end, we had about 60 people along from domestic sell-side and buy-side firms attending which was a great result considering the relatively low profile Progress has at present in this market. There was optimism and an expectation that algorithmic trading had a bright future in China.
I believe it's a practical certainty that the Chinese market will adopt algorithmic and high frequency trading. In every developed market a high, or very high, proportion of trading is done algorithmically and, although different regulations and dynamics make each market unique, nothing except an outright ban will prevent widespread adoption in every market in time. Liberalisation in China is occurring. For example, stock index futures are now traded, exchanges are supporting FIX, short-selling has been trialled and it is now easier for Chinese investors to access foreign markets. Also, earlier this year, the Brazilian exchange, BM&FBovespa, and the Shanghai exchange signed an agreement which may result in company cross listings. Only some of these changes support electronic trading growth directly but all are evidence that the liberalisation necessary to support such growth is happening. Inhibitors remain: no intra-day stock trading, restrictions on foreign firms trading on Chinese markets thus preventing competition and knowledge transfer from developed markets, and tight controls on trading in Renminbi. The Chinese regulators will continue to move cautiously.
The question is not if, but when. We expect to sign our first Chinese customers soon. China is becoming a very important blip on the radar.