Navigating Asia’s bond and equity markets

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Meridy Cleary: Hi, you're listening to Market Matters, our market series here on J.P. Morgan's Making Sense podcast. I'm your host, Meridy Cleary from the FICC Market Structure team, and in today's episode, we're going to explore key themes in Asia across fixed income, FX, and equities markets. To do this, I'm joined by Clare Witts, head of Equity APAC Market Structure.  Hi, Clare, thanks for being on here.

Clare Witts: Hi, Meridy. Thanks for having me.

Meridy: It's great to have you here, Clare. So when it comes to the evolving trading trends and regulatory initiatives in the APAC region, a lot of parallels can be drawn between market structure change in equities and FICC markets. We expect foreign investor access to some of the key emerging markets in the region to remain a top theme. We've seen central banks and markets regulators in the region ease certain controls on onshore FX and bond markets to drive further liquidity and investment. And Clare, what have you been focused on, on the equity side?

Clare: In equities, it's been a tale of two types of market. So for developed markets, particularly Japan, that's been where the majority of turnover is for our global clients. But similar to FICC, it's Asia's emerging markets where we see the most new interest, client questions, and also where some of the most significant market structure change is taking place. So for developed markets, the focus has really been on how to further improve efficiency of trading or reduced trading costs. Japan, Hong Kong, Australia are interesting from that perspective because the stock exchanges are making some quite significant changes to the market microstructure, like improving the auctions and trying to reduce the spread. But in emerging market equities, a lot of the focus is on improving access and attracting new investors. And although there's a lot of change across all of the Asia emerging markets right now, from a global investor perspective, the most interesting ones have been India and Korea, largely because of their relative size and opportunity compared to some of the other EM markets.

Meridy: Yes, I agree. Korea and India are key focus markets for us, too, particularly because of the addition of their government bonds into a growing list of global bond indices. India's fully accessible route, or FAR bonds, are being added to Bloomberg's EM local currency government index from January 31st of this year, and FTSE Russell's EM government bond index from September. And of course, we're approaching the final weight of 10% of India's FAR bonds in J.P. Morgan's GBI EM index in March. So amid these dynamics, we've seen an uptick in the share of FAR bonds held by foreign investors which has grown from around 2% pre-inclusion to now around 6%. So clearly the index inclusions are already having an impact. For India's bond markets, we expect continued focus on topics such as margin posting for India's government bonds, more flexible security settlement, and potentially regulatory change from the Reserve Bank of India or the securities regulators as well.

Clare: Yes, India's clearly been keeping us busy on the equity side, too. You also mentioned Korea, what's happening there?

Meridy: Yeah, definitely. I mean, Korea's had a lot of focus due to recent market structure reform spanning multiple asset classes. And after several initiatives by market authorities, for example, extending FX trading hours last year and allowing third-party FX transactions, Korea's government bonds are set to be added to FTSE's Wigby index starting November of this year. And we do see this as a significant development. The Ministry of Finance expects the inclusion to drive inflows into the local bond market and also increase liquidity in the FX market.

Clare: Yes, and that's helped on the equity side, too. Korea's long been targeting an upgrade to develop market status from emerging market in the MSCI equity indices. Perhaps as part of that, in March, we expect to see the removal of the short-sell ban, which has been in place since 2023, and that's a key focus area for some of our clients. In other topics on our side, with index inclusion, Vietnam's been also pushing some major capital markets reform in order to be upgraded by FTSE from frontier to emerging markets. So that includes the removal of refunding, and there's much more work to be done there on trade and post-trade infrastructure as part of those plans.

Meredith: Yeah, that's really interesting. And what about some of the microstructure dynamics on your side?

Clare: Hong Kong's going to cut their tick size to reduce spreads, so that should be positive trading costs. And India regulators are consulting on introducing a closing auction. It's one of the few markets globally that doesn't have one. Another thing that we can't get through this podcast without talking about, I think, is the potential impact of geopolitics and Trump 2.0 on China and the other APAC markets. And that will undoubtedly have some effect on capital market policymaking and fund flows. So I'm going to be keeping a close eye on how different types of investors in APAC, from the retail through to the domestic institutions, and of course, the global investors, are changing what and how they trade.

Meredith: Yeah, I completely agree. This year is definitely going to be another busy one. And Clare, when it comes to market structure evolution, the topic of execution challenges remains front and center. In the APAC region, a combination of market fragmentation, regulatory change, and market idiosyncrasies add to the complexities around the trade execution process. On the FICC side, trade execution obstacles in certain EM markets are heightened by liquidity constraints, manual workflows, shorter trading windows, and also market access and euro clearability. This year, we expect the industry to focus on efficient workflows and trading infrastructure between liquidity providers and liquidity takers to smooth out some of these constraints. Another point to add is around the extraterritorial impacts of regulation and the potential impact on APAC markets. A good example, which also spans equities, is the move to T plus one in the U.S. that happened last year. And this required Asia-based traders to adapt funding and execution strategies to meet those timeframes.

Clare: Yes, that definitely had an impact on the equity side as well. And we see a number of markets in this region thinking about how they change their settlement cycles going forward, but that's a bit further out.

Meridy: Yes, T plus one is definitely a conversation we're having here in Europe as well. And Clare, I wonder what are some of the key execution challenges on the equity side?

Clare: Two big things. Number one, as you mentioned, there's just the complexity of all the different markets in this region. There's over 16 of them with different market idiosyncrasies and rules. And this drives a huge rate of change. We've got equity trading teams on the ground in almost all the APAC markets, and that local knowledge and access is really helpful, because almost every week we're reacting to a rule change somewhere or a unique trading situation in one market or another. Just to share some information about how big the rate of change is, I do a monthly market structure summary. And every month, there's never fewer than 20 new items on it.

Meridy: Wow.

Clare: So what we need to do then is build a lot of that into the electronic trading platform so that we can smooth out those idiosyncrasies for our clients and really create a somewhat consistent trading experience. Then the second thing that's a big challenge is managing trading costs for institutional sized orders. And this has two components to it. In small ASEAN markets, for example, the issue is often finding enough liquidity given the relatively small size of the market. Whereas in large liquid markets like Japan or India, the trading order book is really thin and even small trades can signal the market and move the price away. So the trading solutions also need to be different. That can be using block desks or facilitation to try and trade in one go or using algos that are designed to manage that signaling risk by breaking up orders and distributing them smartly. So in APAC, probably more than in other regions, there really is no one size fits all for trading. We need to have a lot of different trading tools and channels available.

Meridy: And I guess on the topic of trading tools and execution trends, of course, the rise of electronic trading is a theme that we've all witnessed. It's a trend that has taken off in APAC over the last decade, but particularly since 2020. Our team have been tracking the rise of e-trading in EM, interest rate swaps, government bonds and FX products across APAC markets. For example, we've seen a continued growth in Japanese government bond e-trading driven by enhancements to overall trading systems in the market, which allow brokers to have more capabilities of pricing electronically.

Clare: And Meridy, are algos becoming more popular in the FICC world?

Meridy: Yes, definitely. And we've seen a notable trend in the rise of algo usage in the region, given enhanced algo quoting capabilities and other developments. A good example of this is the significant increase in NDF algos in APAC currency pairs, up around 140% since 2023. And we expect this trend to continue as the depth of liquidity in APAC pairs grows further. Automation trading tools are also growing. For example, the launch of auto pricing and hedging tools. However, in FICC we still see gaps such as local currency markets and APAC high yield bond markets, which are predominantly voice traded. And we're definitely monitoring those developments there. Clare, I'm curious, how has the rise of e-trading in APAC equities grown?

Clare: Well, we're at a different phase in the cycle of electronification for equities in that almost all orders now are traded electronically on every exchange and the infrastructure is well established. But there are two big themes to watch in the year ahead. Firstly, is more choice of trading venues. So this year, we'll see new alternative trading venues launching in Japan and in Korea for the first time, there'll be a new venue as well. So we're going to see more competition to the traditional stock exchanges. The other big change that's coming into APAC electronic trading, and this is something that in Asia is really at a far more advanced stage than the rest of the world, is the scale of retail electronic trading. And I'm sure this is going to continue through 2025. We're seeing retail investors building their own algorithmic trading strategies, often trading from their phones, using APIs as day traders, semi-professional investors. And they're a very significant part of the market activity, particularly in China, Korea, India and Taiwan. And even now, the Indian regulator has a consultation out about how retail traders can build and use algos. So I think the impact of that electronic retail trading activity is a key focus for the year ahead.

Meredith: Well, thank you, Clare. I think we can agree there are a lot of dynamics in these fast moving markets, which is very exciting. And we've covered a lot today from key themes on our radar to execution dynamics. And there's so much more that we could discuss. I'm sure we could go on for another hour. Thank you so much for your time today, Clare.

Clare: Thanks, Meredith. I've really enjoyed it.

Meredith: To our listeners, please stay tuned for more FICC Market Structure and Liquidity Strategy content here on J.P. Morgan's Making Sense channel. If our clients have any questions or would like any further information on the topics in this episode, please reach out to your J.P. Morgan sales representative. I hope you have a great day.

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