Non-Displayed Venues: Finding Ways to Benefit Asian Investors
By Ned Philips
Ned Phillips, CEO at Chi-East, elucidates on how despite the lack of a regional trading framework, non-displayed venues are gaining momentum in delivering benefits to Asian investors.
Trading in Europe and North America is now faster and cheaper than ever before. Under the umbrella of regional regulations such as MiFID and Reg NMS, the proliferation of technology has revolutionized the ways trades are executed. An endless choice of non-displayed venues (NDVs, also commonly referred to as dark pools), lit-pools and traditional exchanges have clamored to offer traderssimplified connectivity, lower latency and better execution.
Although lacking the number of choices as their Western counterparts, Asian investors are not being left behind in the technological race to provide better trading execution and lower costs. Despite the disjointed nature of the Asian trading environment, and perceived barriers such as multiple regulatory and settlement systems, NDVs still allow Asian investors to aggressively pursue the same benefits as those enjoyed by their American and European counterparts.
Asia is an expensive place to trade, especially in comparison with the US and Europe. Large spreads have lowered liquidity in many parts of Asia, which has made life difficult for many investors, especially algorithmic and high frequency traders, by restricting them to more liquid and well-known stocks. For these investors, NDVs are alternate means for them to access both lower transaction costs and higher liquidity, allowing them to undertake more diverse trading strategies.
NDVs do this by helping the market achieve its real purpose – efficiency. Liquidity pools allow traders to reduce spreads by meeting each other halfway between a bid and an offer (mid-point pricing), rather than forcing one party to give in and meet the spread. This has enabled investors to seek best execution and capture significant savings with every trade.
In turn, lower spreads are also bringing liquidity back to lesser-traded stocks, thereby further increasing trading volumes and the overall strength of the market place.
High latency and low impact transactions
NDVs also provide investors with a fast, and most importantly, anonymous pool of liquidity on which to trade large blocks of securities without risking price movements against them. This feature is particularly attractive to brokers, who are coming under increasing pressure from algorithmic and high-frequency traders to provide discreet, fast and low-cost ways of trading Asian securities.
Lower trading costs
Commission payments still make up a large part of trading costs in Asia; while trading costs charged by exchanges remain relatively high (see side-table). NDVs are already contributing to the reduction of these costs. A report by Greenwich shows commission payments in Asia ex-Japan fell sharply in 2009, as fund managers switched to electronic trading options.
Traditional exchanges have also been forced to respond to the price challenge imposed by alternative trading platforms. Already, venues such as Hong Kong Stock Exchange are reducing their fees for certain listed products. Despite this, Asia-based NDVs continue to offer trading fees which are lower than traditional trading venues, allowing brokers and fund managers to pass on further savings to investors.