Daiwa Capital Markets, the investment banking arm of Japan's Daiwa Securities Group, intends to expand its DRECT electronic trading and routing platform to India in Q3 2011, as part of an upgrade to the service in Asia.
DRECT, initially launched as an internal dark pool aggregator in Japan in December 2010, will offer routing between India's two main stock exchanges, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), between the third and fourth quarters of this year.
Only around 12 brokers are estimated to have live smart order routing (SOR) capabilities in India because of the length of time required for regulatory approval.
According to Punit Mittal, global head of electronic trading services at Daiwa, the success of SOR services such as DRECT in India will also depend on harmonisation between clearing houses. Currently, both the NSE and BSE only send trades for clearing to central counterparties in which they have an ownership stake.
“Having two clearing houses increases costs and can make routing a cumbersome process,” Mittal told theTRADEnews.com. “This means that clients aren't ready to take full advantage of SOR just yet, and we are working to simplify post-trade processes before we launch.”
Mittal added that Daiwa is involved in some working groups relating to clearing in India, but said that neither interoperability nor a single mechanism was unlikely to be introduced in India in the short term. At the TradeTech India conference in April 2011, J.N. Gupta, executive director at the Securities and Exchange Board of India (SEBI), said the regulator was “looking into interoperability”.
SEBI began permitting smart order routing (SOR) in August last year, subject to authorisation of each SOR by both exchanges.
Following SEBI's initial circular permitting SOR, the NSE issued guidelines to brokers that imposed a number of additional restrictions, such as limiting order routing only to immediate-or-cancel order types. SEBI clarified matters in December, releasing a follow-up circular that stated stock exchanges “shall permit smart order routing for all orders, without restricting any specific type of order”.
New connections
Daiwa also plans to expand the capabilities of DRECT in Japan, by connecting to additional alternative trading systems including Chi-X Japan and SBI Japannext. Before connecting to the venues, Daiwa will conduct an analysis of the other types of participants and liquidity residing in the pool, the quality of crossing and the most active stocks being crossed, to ensure that information leakage and interaction with toxic flow is kept to a minimum.
According to Mittal, 30% of orders in DRECT receive price improvement on both sides of the trade. He attributes the success of the platform to its mix of order flow.
“Overseas institutions are always interested in the domestic liquidity we offer from our corporate or retail clients, because they are generally on the other side of the order book and therefore improve crossing rates,” he said.
Daiwa also has plans to connect DRECT to Chi-East, the joint dark pool venture operated by market operator Chi-X Global and the Singapore Exchange. Mittal noted that discussions are still ongoing.