Alternative trading systems may not have achieved significant market share in Asia’s equity markets, but their ability to provide institutional investors with precious additional sources of liquidity will make them a permanent part of the landscape, according to Robert Dykes, CEO of trading technology and financial services provider Tora.
In Asia, growth in the use of electronic trading tools such as liquidity-seeking algorithms and execution management systems (EMSs) – a crucial factor in sourcing and connecting to alternative liquidity – has paved the way for off-exchange venues. Dykes notes that compared to 2004, when Tora first launched, use of EMSs among buy-side firms in Asia has grown from 5% to around 25% currently, as traders continue to look for ways to access the market quickly and aggressively.
“Greater adoption will continue and is likely to follow the US, where around 98% of asset managers are now using an EMS,” he says.
Meanwhile, market centre operator Chi-X Global is set to go live with a proprietary trading system (PTS), Chi-X Japan, on 29 July, as well as Chi-East, its dark pool joint venture with the Singapore Stock Exchange, before the end of this year. Broker-operated dark pools are also on the increase.
Dykes believes these new pools are attractive to buy-side firms that have become “frustrated” with the levels of liquidity available on Asia’s primary exchanges. Too often, institutional orders account for several days’ average daily volume in a stock.
“On average, I would guess that 40-50% of an order sent to a domestic exchange does not find a match, so having access to additional pools of liquidity has been a big issue for our buy-side clients,” says Dykes.
But it takes time for off-exchange trading venues to gain critical mass. With so many alternative platforms looking to build a solid base of liquidity, access to each must be seamless to appeal to traders.
Tora has attempted to address this problem with Crosspoint, a buy-side-focused order-routing and crossing network with access to external and non-displayed liquidity.
“One of the problems faced by the buy-side in Asia is the need to post orders into different liquidity pools and subsequently manage those orders while they are in the market,” says Dykes. “Our approach is to map our buy-side order flow into Crosspoint and aggregate this with sell-side pools so that clients only need one point of access to alternative liquidity.”
Tora initially launched Crosspoint in Japan on a buy-side-only basis to build up liquidity before its full launch in February 2010. Dykes reports that 4.5% of total liquidity on the Tokyo Stock Exchange (TSE) now flows through Crosspoint.
In Japan, PTSs were expected to pose a significant challenge to the TSE following the implementation of its high-speed Arrowhead trading platform in January. However, the TSE has retained much of its market share, accounting for 94.2% of liquidity in June according to figures from data vendor Thomson Reuters.
However, Dykes anticipates a greater shift to PTSs – and overall Japanese trading volume – once market conditions are more stable. Furthermore, the prospect of central counterparty clearing for PTSs via the Japan Securities Clearing Corporation will give institutions a greater level of protection against defaults and encourage more trading away from the domestic exchange.
“Market participants expected a larger growth in overall volumes in Japan following the introduction of Arrowhead, but this didn’t seem to materialise in part due to macrofactors," says Dykes. "Many asset managers are maintaining a relatively higher proportion of their assets in cash for fear of getting burnt by market volatility.”
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