1) Trading in Asia presents many challenges for international HFT firms, including language barriers, different regulations around infrastructure ownership and taxes, unique colocation rules at each exchange, and high setup and operational costs. 2) It is important to partner with a local service provider familiar with each market to navigate legal/tax rules, provide multilingual support, and offer customized low-latency infrastructure solutions. 3) Regulations and technologies are evolving rapidly across Asia, so service providers must help clients stay updated on market changes to capitalize on opportunities and avoid falling behind competitors.

1. WHITE PAPER: KVH Financial Solutions
Trading in Asia
The Key Challenges for International HFT Firms
and How to Overcome Them
Table of Contents
2 Introduction
2 Trading in Asia: Challenges
3 Language Barriers
3 Ownership of Infrastructure Assets and Tax Implications
3 Colocation Rules of Engagement
4 Setup and Operation Costs
4 Staying in Touch with a Rapidly Changing Environment
5 Conclusion
6 About KVH
Copyright© 2012 by KVH Co. LTD
All Rights Reserved. Not to be copied or reproduced without express permission of KVH Co LTD
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2. Trading in Asia
Introduction bespoke rules of engagement at exchanges and
other market venues, different market
The opportunities in Asia speak for themselves.
microstructures and languages, as well as having
China is the second largest and fastest growing
to decide which technologies best suit each
economy, Japan is the third largest economy and
particular environment and which service
the second largest IT market, Korea is Asia’s largest
providers will best provide the needed support
derivative market by trading volume, India is
services.
growing exponentially and expected to overtake
China as the largest economy by 2014 , and Hong
This whitepaper aims to outline and explain some
Kong is China’s international financial center and
of the key challenges HFT firms face when entering
key link to the global market. In February 2012,
the Asian financial markets, and how to overcome
overall trading in Asian financial markets grew to
them to succeed in Asia.
US$1.58 trillion.
Many US and Europe-based Trading firms view Trading in Asia: Challenges
Asia as a relatively new market where the
opportunities are boundless. Regulatory changes Trading in multiple markets across Asia
across the region are creating environments involves the complexities of understanding
conducive to the business strategies of High each market microstructure and how to best
Frequency Trading (HFT) firms. Tapping into the capitalize on their opportunities. For
Asian markets would enable traders to access buy-side/sell-side, brokers, dealers, and other
new liquidity pools, allowing them to escape the players in the financial industry, issues related
fierce competition and tight margins of the US and to business areas beyond their core
European markets. Furthermore, as the world competencies can potentially introduce
markets are becoming more interlinked, adding prohibitive costs and delay the time to market.
access to the liquidity pools in Asia would create These issues include IT infrastructure
opportunities for global arbitrage and essentially management and operations,
broaden trading firm’s scope for increasing documentation translation, administration
revenues. and communication with the Asian
exchanges and other venues, and a
However, US and European Trading firms still find it bewildering spectrum of rules of engagement
hard to justify their entry into Asia because of the from the hosting service providers. Below is an
various challenges that come with trading in this outline of how trading firms can address the
unique market. These challenges include various challenges encountered in the Asian
managing different legal and tax regulations, markets, and effectively capitalize on the
opportunities they offer.
Copyright© 2011 by KVH Co., Ltd. All Rights Reserved
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3. Trading in Asia
local language to enable smooth
Language Barriers communication between you and the local
vendors, brokers, and market operators.
Language is the most common and obvious
barrier for foreign investors looking to trade in
Asia. Traders are often hit with this reality once Ownership of Infrastructure
they realize that in countries where English is
not an official language, most, if not all, Assets and Tax Implications
notifications from the market operators are
not available in English. Similarly, when Regulations regarding infrastructure and
working with service providers in such product ownership in Asia differ greatly from
countries, trading firms can use up significant those of the US and European markets.
time and resources resolving relatively simple Having a strong understanding and
issues when a US-based trader who has to consideration of these regulations with a
work with a local engineer based in Tokyo, service provider could help avoid tax issues
Seoul, or Shanghai speaks limited or no English for foreign trading firms.
at all. In the fast-paced trading industry, these
time-consuming bumps in the road are not a For example, you need to carefully assess the
luxury that can be afforded. existence of “Permanent Establishment” in
light of Japan National Tax Agency's rules.
If trading in such markets, trading firms must Having a local business partner, experts or
ensure that the service providers they use vendor that is familiar with the appropriate
have multilingual capabilities at all levels of rules or one that could alternatively supply
the service stack. Rather than merely working local infrastructure to help avoid any
with a bilingual salesperson that speaks potential complications, would enable a
English and the native language, ensure the smooth entry into the Japanese market.
service provider’s service desk, operations
team, and line of management also have
Colocation Rules of
bilingual abilities for cases when issues are
escalated and clarity of communication is
Engagement
most important. Ideally, your service provider
will also offer multilingual capabilities as part Every Exchange/Market Operator with a
of their facilitation services to guide you colocation or proximity venue has different
through any documentation, terminology, or rules governing the use of their services.
necessary procedures that take place in the Understanding what these rules are and how
Copyright© 2011 by KVH Co., Ltd. All Rights Reserved
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4. Trading in Asia
to effectively navigate the obstacles is critical A key component of cost-efficient trading in
for any non-member trading firms. At present, Asia is leveraging the right infrastructure and
some Asian exchanges restrict which parties network service provider that can address the
can contract for space in their colocation or trading firm’s specific business needs. For HFTs,
proximity locations. There are also various rules a highly secure and reliable ultra low latency
on what outbound connections can be network that spans across Asia and with
made from colocation space provisioned access PoPs in the key target markets is the
from the exchanges. basic building block. A service provider that
can package the entire infrastructure value
To capitalize on exchange colocation stack, including network solutions, data
environments, leverage a reliable service center services together with remote hands,
provider that offers customized and project management and facilitation services,
integrated solutions. KVH currently has a will lower the total cost of ownership while
partnership agreement with multiple allowing the HFT to concentrate on its core
exchanges, including TSE and Kosccom (ICT competency in trading strategies.
company of KRX), to provide their colocation Furthermore, the financial ecosystem that
and proximity hosting services and allow derives from the network provider’s already
access for potential market players to a connected financial firms will offer the HFT
broker neutral environment in those trading making entry into the Asian markets a wider
venues. KVH’s ultra low latency Ethernet range of options to seamlessly integrate the
delivery platform has also been adopted for elements of their trading infrastructure
local and global exchange connectivity to platform. This shortens time to market and
enable the delivery of complete service lowers setup costs.
offerings to any type of trading firm.
Staying in Touch with a Rapidly
Setup and Operational Costs
Changing Environment
For HFT firms, setting up and operating
colocation or proximity infrastructure in Asia Asian capital markets are still evolving and
can consume a lot of time and resources that doing so very quickly. In each Asian
could otherwise be allocated to addressing jurisdiction, the regulators are trying to adapt
their core business of trading. The associated their rules to the increasingly global make up
complexities will translate into increased costs, of both the financial products and the
often deterring trading firms, particularly financial market participants. There are
smaller firms, from entering the market.
Copyright© 2011 by KVH Co., Ltd. All Rights Reserved
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5. Trading in Asia
increasingly common reports of regulations developments in their domicile through
addressing systemic risks, fostering newsletters and other forms of regular
competition and protecting ordinary retail updates.
investors. The accessibility and supportability
of advanced new technologies is also
Conclusion
changing the landscape as US and European
technology firms build out their footprints in Asia’s expanding and rapidly evolving capital
the region. Although the above markets offer trading firms across the globe a
developments may make news headlines in broad range of opportunities. However, there
their respective countries, they hardly get a are many challenges created by the diverse
mention in the US or European media where market structures, regulations, language and
the foreign HFT firms are domiciled. cultures, trading behaviors, and access to
Market-shifting developments may be missed, technology across the Asia Pacific markets.
potentially leading to a hitherto With diligent evaluation and the right local
market-leading HFT falling behind its service providers to handle the local
competitors. It is therefore important that the complexities, US and European trading firms
service providers that an HFT firm partners with can successfully and cost effectively be part
provide a window into the industry of the Asian growth story.
Copyright© 2011 by KVH Co., Ltd. All Rights Reserved
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6. Trading in Asia
About KVH
KVH is an Asia Pacific IT Services and Data Center Services Provider established in Japan. KVH’s
Information Delivery Platform delivers integrated cloud and network solutions and best-in-class service to
its customers. KVH owns infrastructure and provides services that enable clients to store, process, protect
and deliver their vital business information. KVH provides IT Services, Cloud Services, Data Center Services,
Managed Network Services, and Professional Services.
KVH has a presence in Tokyo, Yokohama, Osaka, Hong Kong, Shanghai, Singapore, Seoul/ Busan, and
Chicago, and serves over 1,900 customers in broad industry segments such as financial services,
manufacturing, media, gaming, and e-commerce. More information on KVH can be found at
www.kvh.co.jp/en/
Copyright© 2011 by KVH Co., Ltd. All Rights Reserved
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