Finding Liquidity In Australia
With Richard Nelson, Head of Australia and Japan Equity Trading, T. Rowe Price
In terms of block trading Australia is looking fairly healthy. Most of that is thanks to the agency brokers rather than facilitation; you can get facilitation but not in the sizes that we can when trading agency blocks.
Asia as a whole is a little bit different. Japanese domestic trading is still pretty much focused on hitting benchmarks, and it’s difficult to find blocks. Interestingly though, there is a new facility where people can send a watch list or allow access to what we are putting in our algos, which then allows a proper conversation. In addition, the penetration of dark pools and trading platforms in the region is getting better.
The situation is difficult though overall, and there are certainly difficulties with the current way we have to trade: breaking up orders into different pieces with algos. As big institutional buyers and sellers, if we can’t find blocks, we have to trade in smaller sizes, across multiple venues using algos. This just generates a lot more signalling, which leaves us open to being taken advantage of by HFT and other participants.
However, the situation for finding large blocks and getting trades in size done will get better. One reason for that is that asset allocation around the globe at the moment is still very much in fixed income and not equities. Once we see interest rates starting to rise we’ll see a move in asset allocation back to equities, which in itself means that there is more liquidity, with more people looking for liquidity and more liquidity being offered.
We’re probably on the high end of using dark pools to find liquidity. ASIC has been working hard on the issue of trading in Australia, and they have made changes to the regulations so when we are trading in the dark, we have to get meaningful price improvement. This basically means the buy and sell is done at the mid-price which works well for us. Further, we do minimum execution quantities to try and minimise signalling. ASX also has single counterparty fills so we can elect who we execute with. Unfortunately, this facility does not exist at all venues which means we can end up hitting very small orders. This is ultimately just giving a free tip-off to HFT firms to let them know what we are doing. If I could avoid those smaller orders I absolutely would; it doesn’t benefit me at all to hit them.
The market itself can do a great deal to help fix the situation and make it easier to trade more blocks and orders of a meaningful size. Fundamentally we want to be able to get executions done without creating too much noise. It’s a matter of using the right avenues and having the right counterparties available.
Every market can learn from looking at what’s happening in other markets, just as other markets can look to what Australia has done in terms of dark pools and insisting on price improvement, minimum execution quantities and single counterparty fills. They were smart, simple things to do and fair for everybody: some other markets have taken that on board.
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