Dark Pools in Asia: The Real Story
By Robert Laible, Lee Porter, Ned Phillips, David Rabinowitz, MIchael Corcoran, Greg Lee
FIXGlobal.com asked leading figures in the trading industry to share their insights into dark pools in Asia. In the first half of 2011, the number of dark pools operating in Asia increased, as did the volume traded on these venues.
Despite these increases, concerns remain about safety and gaming issues are a constant concern for long-only and institutional investors. Nonetheless, dark pool operators profess that their venues still meet the fundamental client demands for reduced market impact and lower trading costs.
What’s the real story with dark pools in Asia?
David Rabinowitz, UBS, Head of Direct Execution, Asian Equities
While Asia Pacific will see an expansion in terms of the types of dark pools in which non-displayed liquidity resides, the continued development of broker-led internal crossing engines will remain the primary dark source for market participants seeking to trade anonymously in an attempt to minimise information leakage and capture some price improvement in the process. The associated smart order-routing capabilities necessary to connect these alternative sources will drive liquidity strategy into 2012.
Rob Laible, Nomura, Managing Director, Nomura International Hong Kong
The real story is that dark pools fill a void that the exchanges are not equipped to deal with. Also, they save money – whether the buy-side can do a block with no information leakage, or the sell-side algo does not have to cross the spread (which means better performance). TCA has the ability to measure the cost savings and it is resonating with those in Asia that are looking to preserve alpha and increase their performance.
Michael Corcoran, ITG Asia Pacific, Managing Director and Head of Sales and Trading
The Asian dark pool story is still in its early growth phase. ITG is seeing increasing demand from global and Asia-based buy-side for tools that reduce the high costs of trading in the region. Dark liquidity is key, and with dark aggregation addressing some of the issues of Asia’s fragmented liquidity, volumes will continue to rise.
Ned Phillips, Chi-East, CEO
Are dark pools here to stay? Yes. Dark pools in their purest form are the end product of what savvy traders have been doing manually for years on the phone – seeking liquidity and best execution. Is there a danger of gaming? Yes, but it’s way less in dark pools then in manual off-market crossing with the information leakage that occurs there. Dark pool consolidation? We need more pools in Asia first before we can consolidate.
Lee Porter, Liquidnet Asia, Regional Head
All dark pools have a duty to protect and police their communities to ensure the highest standard for members and other stakeholders. The integrity of our platform is key to Liquidnet’s success and that is why we don’t hesitate in asking members to leave if they are not playing by the rules. At the same time, ongoing improvements in technology is aiding the industry and helping ease industry concerns.
Greg Lee, Deutsche Bank, Head of Autobahn Equity Asia
There isn’t a generic answer for the entire region when it comes to dark pools. Different structure and regulations will determine each markets direction. In Japan and Hong Kong we expect that these volumes will continue to rise. Hong Kong regulation doesn’t permit alternative displayed venues, so the market is looking to dark pools for alternative liquidity.
In Japan they have growing PTS volumes, so this could detract from the dark pool growth. In Singapore the minimum crossing size will prevent growth. In Australia they have the on exchange Centerpoint cross, which is growing, but they are also looking at increasing their minimum crossing size for off-exchange dark pools, which would have a negative effect. Outside of these markets, we see little or no dark pool activity or planned growth.