DMA door opens for foreign investors

Direct market access is the way most Russian investors trade futures and options. But so far, few international firms use it – or they use it with caution. On December 2, RTS Stock Exchange hosted an FOW roundtable at its London office. Leading brokers and investors discussed the potential for DMA to unlock even greater liquidity for Russia’s derivative markets. It was during the discussion that news came through of Russia’s successful bid to host the 2018 World Cup – a sign of confidence in the country’s future that echoed the optimism of the roundtable participants.

What forms of DMA are available to investors in Russian equity and derivative markets? When did they start and what has the initial uptake been like?

Sergey Zamolotski, RTS Stock Exchange

There are two major forms of DMA in Russia. The first is when end clients trade in the market through a special front end, provided by a broker. Each order goes first from customer to broker and then from the brokerage infrastructure to the exchange. The second type of DMA is usually called in Western markets naked access. The customer gets a special log-in to send orders to the exchange directly, without going through the broker’s infrastructure. But unlike in Western markets, with naked access in Russia, the exchange provides special risk management tools. At RTS, DMA was launched initially in 2000 I think when we launched the Forts market – Futures and Options on RTS. Now it’s available for all cash and derivative markets on RTS, and almost all our customers are now trading through DMA, in one of those two forms.

Vladimir Kurlyandchik, Arqa Technologies

I think 100% of trading on the derivatives market is DMA access. What is not so typical for Western markets, most private investors typically trade through DMA in Russia, and they always have. For naked access to exchanges, there are different programmes and interfaces, including proprietary gateways of the exchanges and variants of Fix connection. We are a technology vendor, providing solutions for both forms of DMA. We have a brokerage system named Quik that can be used to give customers a front end trading screen, and we also organize special gateways for brokers and for their customers to gain naked access. For example, we provide low latency Fix connectivity to RTS. We connect to all markets in Russia and to several abroad, like the London Stock Exchange, NYSE, Nasdaq…

Kevin Dougherty

There’s also DMA on foreign exchanges where Russian securities trade. London Stock Exchange is the primary one, there’s New York Stock Exchange for the US-listed securities, and some of the other European exchanges for other instruments, so there’s terrific access. We traded the RTS futures quite actively and the DMA access to that was quite good. We used broker platforms to get to the exchanges primarily, really for risk management purposes.

Stas Surikov, Renaissance

I wouldn’t say that 100% of the trading volumes are DMA actually. If we are describing DMA as the end client order flying without manual intervention or with minimum intervention to the exchange and getting executed, then I’d argue that at least 20%, or maybe much more, is still OTC. Obviously all the principal trading by big houses is electronic, so the exchanges see all those flows as electronic. But on the client side it’s not that straightforward. There are a lot of obstacles for the foreign investor trying to access the market, starting from the simplest taxation issues when dealing with the Russian domestic broker, and the rouble currency and all those issues. So a decent proportion of trading, especially on the RTS Index, is still OTC. However, we provide both types of DMA to RTS, MICEX and LSE, and the domestic client base has been trading DMA for about 10 years. Unfortunately the international client base has only just, in the last maybe two years, started getting true DMA access to the exchanges including RTS.

Tim Bevan, Otkritie

Yes, there’s a huge difference between the domestic and the international markets. The local market is very DMA-orientated. Russian retail doesn’t really fall into the same category as Western retail. Usually these are exceptionally sophisticated guys, even running algo strategies, albeit with say $10,000 or $20,000 worth of capital, and a lot of it is traded DMA. Internationally there are the barriers Stas alluded to, predominantly around third party settlement, pre-delivery and rouble risk. However, in the last year there has been a huge increase in interest. What you do have is incredible pools of liquidity in Russia – you have a recent record of just over $7bn notional traded on Forts in a day. When you consider that is largely domestically driven liquidity, that’s an extraordinarily attractive prospect for international firms, as a sort of virgin pool to trade into. Now I don’t see personally an issue with DMA access to Forts for internationals. It’s relatively easily to set up, there aren’t necessarily tax or regulatory issues, it can be done. There are a few quirks – the RTS Index Future, which is the dominant product, is a little unusual in that you have a dollar index margined in roubles, so the maths becomes a bit unusual, but in terms of core access to that liquidity it can be quite vanilla.

Oleg Jelezko, Da Vinci Capital

My matrix of DMA versus manual is based around the products. In futures I would agree with an 80-20 split. Eighty percent is DMA flows, mainly from local clients, although this year we saw some increasing flows through certain brokers like Otkritie and maybe Renaissance. Twenty percent is done manually by the brokers because they take trades with their clients in swaps or other instruments and hedge them with execution on Forts. These are big tickets but they are not frequently traded, so the volumes are not that big. In the options market most of the flows are manual and OTC, there is very little done by DMA. There are some flows from Russian clients but because of the volatility coming down significantly and the spreads still being widened, the volumes are still small compared to before the crisis. In options a lot of brokers simply cross the OTC trade through EDX or do it direct via the brokers. And in equities, the split is probably 30% manual and 70% electronic DMA, with more DMA done on Micex than on RTS Standard. RTS Standard is just catching up with local clients and hopefully will have international clients trading DMA and DVP [delivery versus payment] next year.

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