Slowly, quietly, with little fanfare or braggadocio, changes are taking place in the way foreign traders execute their orders in China's A-share market. At least, so the service recently introduced by Bank of America-Merrill Lynch would imply. And that's despite the fact that the bank does not yet possess a Chinese broking licence.
About a month ago, on May 14, the first trade was transacted on the Shanghai stock exchange using the US bank's direct market access (DMA) platform. It was the first ever instance of DMA trading in the A-share market and saw one of BoA-Merrill's "high frequency clients" buy 300,000 shares of the China 50 ETF, which is managed by China Asset Management, according to Mark Wheatley, the bank's head of Asia-Pacific electronic trading.
Since then, BoA-Merrill has transacted an increasing number of deals each day for three Asia-based clients, said Wheatley. The DMA platform provides an advantage for traders who need rapid execution, as orders are filled almost instantaneously. It is also anonymous. Arguably, it has less obvious attractions for buy-and-hold fund managers, and Wheatley concedes that "we have seen less immediate interest from traditional long-only funds".
DMA is a method of trading that allows buy-side institutional traders to place orders on the market without any manual intervention. Orders are placed electronically using a variety of execution management systems (EMS) set up on clients' desktops. The orders are then automatically routed to the relevant exchange and order fills are sent back on the EMS. This process is instantaneous and conceals the identity of the buyer and seller.
BoA-Merrill Lynch already offers DMA to clients trading stocks in Australia, Hong Kong, India, Japan, Korea, Malaysia, New Zealand, Singapore and Taiwan. It has sales and execution desks in Sydney, Hong Kong, Tokyo and Mumbai to service these customers.
But, "the Chinese A-share market has developed into an important and large component of the Asian stock universe despite its access limitations", said Wheatley. "Our A-share DMA platform allows our clients to trade this market in the most efficient manner," he added.
Bank of America-Merrill Lynch's China A-share DMA platform is traded on "swap" via the bank's qualified foreign institutional investor (QFII) quota and is subject to both the aggregate and individual foreign ownership levels associated with QFII. The investor enjoys the economic benefit but not direct ownership of the A-shares, which are retained in BoA-Merrill Lynch's QFII account. Payment is made into a reserve account which is part of the client's swap account with Merrill Lynch International.
BoA-Merrill Lynch had to step over many hurdles in a process that took several months, negotiating with various Chinese regulatory bodies and providing assurances about operational standards and diligence before approval was granted.