With dark pool aggregation slowly taking shape in Asia, buy-side traders are seeing the development as a significant step towards rebuilding liquidity across the region's fragmented markets in the longer term.
However, unlike in the US where the sheer number of dark pools compelled brokers to find ways of bringing together the various sources of dark liquidity, things are different in Asia where the low levels of liquidity in dark pools appears to have led the push towards aggregation.
“One reason aggregation is happening to dark pools is that a lot of the dark pools aren't very big. There's not a lot of sizeable flow in them at the moment so people are trying to do what they can to increase activity,” said one head of Asian trading at a global investment management firm. “But we're still in the early stages. They need a lot more client participation and some rule changes really to encourage momentum.”
Recent examples of liquidity aggregation services include TORA Crosspoint, initially launched in Japan by Tora Trading and now linking to around half a dozen Japanese pools, as well as ITG's POSIT Marketplace, which went live in Hong Kong in March and will soon be available in Australia. Will Psomadelis, head of trading, Australia at Schroder Investment Management, is optimistic about the benefits to market impact and price discovery that liquidity aggregation will bring.
“Liquidity aggregation for buy-side clients is an important thing. Block trading is the cheapest way for the buy-side to execute in terms of market impact as well as providing proper price discovery. The fact that trade sizes have fallen is an issue because people are now preferring to chop their orders up and place them over the day rather than execute blocks of stocks. Traders are falsely perceiving VWAP to be the risk-free way to deal with an order,” said Psomadelis.
According to ITG, more than 110 clients have already signed up to POSIT Marketplace, which currently links four dark broker-backed liquidity pools for Hong Kong equities.
“In Hong Kong, even though there's just one single exchange, there's always been the ”upstairs book' within the broker environment. So what POSIT Marketplace enables the buy-side to do is to access the other forms of liquidity which have always been there away from the exchange order book,” said Michael Corcoran, ITG's managing director and head of sales and trading, Asia-Pacific.
For Clare Rowsell, ITG's head of client relationship management & marketing, Asia-Pacific, aggregation tools are necessary to help the buy-side minimise market impact without incurring extra cost. “Traders need to be able to make the most of liquidity without causing significant market impact, so although the exchange may centralise in a lit venue, there is that necessity for the institution to avoid moving the market – which is the whole rationale behind dark liquidity in the first place. Dark liquidity venues exist, but the challenge is to make the trader's life easier by bringing those different sources of liquidity together so that one can access them from a single point,” said Rowsell.
Ian Lombard, Tora's chief operating officer, adds that a key advantage of leveraging tools such as Crosspoint is the scope for improving crossing rates. “If you're crossing at mid tick and the average spread in Japan is 22 bps, that will save you 10-11 bps,” he said. “The uniqueness of Crosspoint is it looks at every order and tries to find price improvement in an intelligent way without changing the day-today behaviour of the trader. “What dark pool aggregation gives you is effectively an element of smart order routing which you can send to a single venue and take advantage of the linked liquidity in multiple venues.”