Asia is currently the most popular region for trading new markets among proprietary trading firms, hedge funds and bank execution and trading desks, according to a new joint report by Acuiti and BSO. This is as trading firms are increasingly looking to expand their strategies to new markets at the same time exchanges in those markets are making big investments in their infrastructure and technology.

However, the report notes that high cost of connectivity , long timeframes for market entry and concern over latency, which has become increasingly important even among firms that do not rely on it for their strategies, are critical factors standing in the way. However, trading firms are increasingly counting on third-party providers to ease these challenges.

Acuiti’s new report is based on a survey of senior executives from 76 proprietary trading firms, hedge funds and bank execution and trading desks. Majority of the report’s respondents work for European companies, with other based in Asia, North America and other parts of the world.

Asia Is Top Choice for Expansion

According to the report, other top jurisdictions trading firms want to establish new markets are Latin America, Middle East and Europe. In particular, Taiwan is the most popular new market in Asia, followed by South Korea and Hong Kong. While Indian and Chinese onshore markets are also top choices, they rank lower in the executives’ estimations.

“While China has a well solid investment story, many firms have found it complex to navigate and concerns still persist around getting money out of the country,” the report said. However, the report points out that new rules due for enforcement later this year is expected to accelerate interest in trading Chinese onshore markets.

Furthermore, Brazil, Mexico and Chile are the top three new markets trading firms are eyeing in the Americas; Saudi Arabia, Dubai and Qatar in the Middle East; and Turkey, Poland and Austria in Europe.

The Challenges of Market Expansion

Meanwhile, 56% of respondents in the survey said their companies intend to connect to a new market in the next three years, with the majority doing so to diversify their trading strategies. However, the high cost of connecting to a new market is a big challenge.

“Almost 60% of firms surveyed reported rising costs of connecting to a new market over the past five years. Executives reported that costs tended to rise as they sought to establish connectivity to more emerging and frontier markets,” the report explained.

On delay experienced in establishing a new market presence, majority of the respondents told Acuity that the period for connection to new markets after a decision to expand has been made has risen to seven months or longer.

“Close to a quarter said the process lasted more than a year,” the report said, adding that while prop trading firms and banks found the process longer, hedge funds were able to implement their strategies at greater speed most likely due to their prime brokerage relationships.

On latency, the Acuiti survey found that the time it takes for an order to be executed after it is placed remains an important factor for all firms when expanding into new markets. It said this factor, in fact, “remains more important for prop trading firms, especially for the top tier shops, than for other company types—reflecting their role in market making across global exchange.”

To address these challenges, the report notes that the trading firms are choosing to partner with third-party providers to save cost, reduce market entry delay and support the maintenance of their business.

“These vendors often have long standing expertise in the markets that firms want to enter and [have] established connectivity rules,” the report noted. “They are also adept at providing low latency connections, which is becoming increasingly important to a wider range of firms beyond those traditionally focused on ultra-low latency connectivity.”

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