Dark pools, brokers' internalisation engines and block-trading mechanisms will play an increasingly important role in providing much-needed liquidity to Asia's buy-side, according to panellists in a discussion entitled ”Last Mover Advantage – Aggregation and The Future Liquidity Destinations', at the 9th Asia Pacific Trading Summit held in Hong Kong on 25 May by FIX Protocol Ltd.
“As long as we're working more orders in the market, then by default we're using more dark pools,” said Kent Rossiter, head of trading, Asia Pacific at RCM. “We try to match it up, probably more than some of our peers, before we even go into the market. But you can't do that on every order; there are some names on which you just can't find the liquidity the old-fashioned way by sales traders.”
The panel discussion, moderated by Robert Laible, Nomura's managing director and global co-head, electronic trading & QPS sales, also included Chris Jenkins, managing director, Asia Pacific of Tora Trading, Ned Philips, CEO of Chi-East, the regional dark pool owned by Chi-X Global and the Singapore Exchange, and Will Psomadelis, head of trading, Australian at Schroder Investment Management.
Usage of dark pools in Asia is still in its early phase, and a number of market participants argue that the development of aggregation tools will be key to addressing some of the issues surrounding Asia's fragmented liquidity. But regulatory impediments, such as Singapore's minimum crossing size requirement, exist. Australia is also looking at increasing its minimum crossing size for off-exchange dark pools.
Market participants typically make use of dark pools to trade anonymously, minimise information leakage and capture some price improvement in the process. Some believe broker-led internal crossing engines will remain the primary dark source for investors, while others suggest that the development of smart order-routing capabilities to connect alternative sources will be a major driver of growth. In the The TRADE's 2011 Algorithmic Trading Survey, dark-liquidity seeking algorithms were the second most commonly used type of algorithm used on Asian trading desks.
In response to Laible's question about whether the level of block business in general will grow over the next few years, Psomadelis replied positively. “The buy-side will be more inclined to find the other natural side of the order because investors are more comfortable trading with people with the same capital investment objectives,” he said. Rossiter added, “Block trading will only grow in importance. It's been important for us and will continue to be.”
Panelists also noted a desire for more transparency about dark pool participants. “We're seeing different brokers and different pools coming up with the ability to choose which clients they want to interact with,” Philips said. “There are two types of transparency: the first concerns the type of counterparty you want to interact with; the second is about pre-trade transparency. The more standardised the regulations that we can get around transparency, the more comfortable people will feel.”
Within Asia, Japan will continue to be the leader in alternative trading, while usage of dark pools is also expected to grow in Hong Kong, in part because regulations do not allow alternative displayed venues.
Philips added, “Not all dark pools are created equal and it's the consumer demand that will drive what happens in each jurisdiction.”
Despite the growth in dark liquidity sources, Tora's Jenkins said that fragmentation in Asia was unlikely to reach similar proportions to the US.
“The market in Asia is always going to be different from the US. I don't think we're anywhere close to getting to a similar set-up that is there,” he said.
On the technology and operational issues that need to be considered, Philips said, “A lot of focus is placed on the front-end part of what a dark pool provides. So clearly price improvement, connectivity, execution is important and that's part of the technology and operational challenge that we face. But in Asia the full cost of the trade from end to end – including clearing and settlement – is not always considered. Europe has had more success to date and I hope Asia will also be able to reduce the cost of clearing and settlement.”
Author: Jill Wong