Alternative Trading Expands in Indonesia and Malaysia
Lee Porter, Liquidnet, explores the new territory of alternative trading platforms in Indonesia and Malaysia as traders seek new opportunities for growth.
In a relatively short time, alternative trading platforms in Asia have emerged as critical venues for institutional traders to source offexchange liquidity. They provide choice and ultimately help reduce costs through reduced transaction costs and lower market impact. So-called ‘dark pools’ have largely been focused on trading around the established financial centres of Hong Kong, Japan, Singapore and Australia, where the majority of the region’s liquidity is located. The next stage in the industry’s evolution in Asia is a push into emerging markets, and moves are well underway.
The increasing interest in South- East Asia stems from two long-term trends impacting the buy-side: high economic growth which is fuelling demand to trade locally listed securities where there is often low liquidity, and high market impact. As regards the first point, the story of South-East Asia’s economic transformation has been remarkable. Real GDP growth is expected to average 6% between 2011-2015, supported by strong domestic demand, according to the OECD. Meanwhile, South-East Asia’s population jumped 15% in the ten years to 2010, climbing to 607 million.
These demographics continue to attract global investors, helping push higher the local equity markets. For example, the benchmark Jakarta Composite Index gained more than 45% in 2010, making it the best performer among Asia’s ten biggest markets. More money is expected to flow into the region in the coming years. At the same time, liquidity in South-East Asia remains scarce, presenting a significant challenge for institutions looking to trade large volumes of shares.
The Jakarta Stock Exchange in Q1 2011 recorded an average execution size of US$4,677. This compares to an average execution size of around US$1.1 million on on our platform for Indonesianlisted securities during the same period, i.e. 234 times larger than the local exchange. The story is similar in Malaysia where the Bursa Malaysia in Q1 2011 recorded an average execution size of US$6,053 compared to US$1 million reported by Liquidnet.
Local exchanges across South- East Asia, like most of their global peers, are geared towards the needs of retail investors, as seen by relatively small transaction sizes. Moving forward, we see growing demand from institutional investors to access large blocks of shares in those markets (See  next page). The rising demand on alternative trading platforms for South-East Asian securities has been strong.
For example, principal traded on Liquidnet’s platform in Indonesia, Malaysia and Singapore for Q1 2011 was close to US$380 million. This was a jump of over 176% from Q4 2010 (See  next page). When traders find a match in Indonesia they are far more likely to execute the trade, we suspect, because of issues surrounding a lack of liquidity and potential market impact costs.
In addition, traders seeking to execute on public venues in South-East Asia are contending with very wide spreads. This is a factor which can be mitigated on alternative trading platforms, helping institutional traders transact at the fairest price. The problems institutional investors face in Malaysia, Indonesia and Singapore are in fact universal. The solution for many traders is to allow institutions to transact large blocks of shares in a safe and secure environment.
Looking ahead, other markets of South East Asia may draw alternative trading platforms, such as Liquidnet. While it may be too early to speculate about a likely entry date, it is fair to say that the demographics and market dynamics support the entry of alternative trading platforms, which in turn, help support the needs of institutional traders.
Logistically, the issue of connectivity for Malaysia and Indonesia is straight forward. In both markets, some alternative trading platforms trade off-shore and transactions are processed through a licenced third-party broker and reported to the local exchange. While there are occasionally misconceptions about the role of alternative trading venues in some markets, our experience in South-East Asia has been overwhelmingly positive.
Local exchanges, we believe, see alternative trading venues as complementary, given that they offer volume discovery to match their price discovery. Alternative trading venues also help bring to the market additional liquidity which may otherwise not find its way to the exchange, as buy-side traders may be reluctant to execute on exchange.
The move to offer trading in listed Malaysian and Indonesian securities also comes as regional exchanges in South-East Asia develop closer trading ties. Four exchanges, operated by Singapore Exchange Ltd, Bursa Malaysia Bhd, the Philippine Stock Exchange Inc and the Stock Exchange of Thailand, announced plans in February for the Asean Trading Link.
This will interconnect markets electronically, enabling investors to buy or sell shares in any of the markets whilst settling the transactions in their home market. The proposal would not impact attempts by alternative trading venues, such as Liquidnet, to deliver off-exchange trading in local securities, given that all trading is still settled and reported locally.
As we look ahead to the coming years in the region, we remain excited about the potential offered by emerging markets, particularly South-East Asia.