Empowering the Buy-Side - Will alternative venues re-shape trading?
The emergence of alternative trading venues, including dark pools, has provided the buy-side with increased liquidity, flexibility and additional execution options. Lee Porter, Head of Liquidnet Asia-Pacific, looks at the opportunities and challenges that lie ahead for the industry.
Prior to 2000, the two incumbent US stock exchanges, the NYSE and NASDAQ, dominated the equity trading landscape, leaving little choice among traders for execution venues. More than 90 percent of all executions were transacted on these exchanges. The opportunities to execute a trade of significant size were fairly limited: your broker would either commit capital or try to execute the order “upstairs” and find a natural contra to cross the trade. This was the original dark pool.
How times have changed. Through advancements in technology, altered regulation and increased sophistication of buy and sell-side participants, traders now have a plethora of alternatives to execute their orders. This applies to both the venue and method. The exchange duopoly in the US has been broken, efficiencies gained and trading costs have tumbled, all to the benefit of end investors.
The US has led the way with the evolution of MTFs, ECNs, dark pools and broker internal crossing networks, among others. Data from Tabb Group (next page) clearly shows the trend over the past few years of the incumbent exchanges’ decreasing market share to the advantage of new entrants.
Today, over 60 ATS’ are registered with the SEC in the US. Liquidnet, the largest block crossing platform in the US, according to the TABB Group, was one of the first to emerge and remains the only venue focused exclusively on the buy-side. Market share estimates for off-exchange trading in the US and Canada vary dramatically, but all show the market share on incumbent exchanges declining with flow migrating to venues that offer differentiated execution quality.
With US-based alternative venues providing clear benefits to the industry and end investors, it was only a matter of time before operators eyed opportunities abroad. Their arrival in the UK and continental Europe immediately challenged the local exchanges, which had long enjoyed the safety of favorable regulations to protect their monopolies. Today, according to figures released by the Aite Group, an estimated 16 percent of equity volume is executed through MTFs, with Chi-X leading the way.
The next logical step for alternative trading venues was expansion into Asia-Pacific, a region of growing global importance, but with geographic, cultural and technological challenges not yet encountered in the US or Europe.
Among the first to establish a presence in the region was Liquidnet with the launch of trading in Hong Kong, Singapore, Japan and Korea in 2007. Australia followed in early 2008. In addition to these socalled “dark-pools”, such as Liquidnet and BlocSec, several internal broker pools and crossing networks have already sprung up across the region.
Yet, the number of venues, as compared to Europe and the US, remains small. Market share is also a fraction of that traded on traditional platforms. An estimated 1 percent of executions in Asia-Pacific are performed away from local exchanges, according to a report from Aite Group.
Still, forecasts for industry growth are encouraging. Aite Group estimates that by 2012, 20 percent of equity trades in Asia-Pacific will be executed through alternate venues.