With trading costs for mid and small-cap stocks far higher than those for large cap stocks across Asia Pacific markets, the price improvement offered by dark pools for smaller stocks is driving their use by fund managers, according to new data from agency broker and financial technology supplier ITG.
ITG's ”Asia Pacific Liquidity Barometer Q2 2011' report released, for the first time, a breakdown of average implementation shortfall trading costs by market capitalisation, which showed that large-cap trading costs in the first half ranged from 29 basis points (bps) in Australia, 41 bps in both Hong Kong and Singapore, 34 bps in Japan, 47 bps in Korea and 56 bps in Taiwan.
However, mid- and small-cap trades result in far higher absolute costs and wider cost ranges between these markets. Mid-cap average implementation shortfall costs are 48 bps in Australia, 68 bps in Hong Kong, 63 bps in Singapore, 52 bps in Japan, 81 bps in Korea and 72 bps in Taiwan. The corresponding small-cap figures are 61 bps in Australia, 58 bps in Hong Kong, 61 bps in Singapore, 80 bps in Japan, 101 bps in Korea and 89 bps in Taiwan.
On the whole, average implementation shortfall trading costs in the first half of 2011 range from 36 bps in Australia, 39 bps in Japan, 45 bps in Singapore, 49 bps in Hong Kong, 58 bps in both Taiwan and South Korea.
“If we look at crossings in POSIT Marketplace, we do see a significant amount of mid caps traded in the dark. Part of the reason is because the spreads on those tend to be higher than the large caps, and hence the actual benefit of crossing them in a dark pool where you save half the spreads is much more significant,” said Ofir Gefen, head of research and algo consulting, ITG Asia Pacific.
“More clients are using alternative trading systems in Hong Kong and therefore there are more volumes in them right now. As a percentage of what's done on the exchange, we are still talking low single digit numbers but the growth in dark pool crossings is interesting enough that buy-side firms can't ignore it. If you get executed, especially on your mid caps and small caps, your savings at the mid point versus paying the full spread on the market is larger,” Gefen added.
Turnover data for POSIT Marketplace, ITG's dark pool aggregation service, showed that large caps made up 54% of trades, while mid-caps and small-caps made up 41% and 5% respectively. For Hong Kong, the corresponding figures for large, mid and small caps are 59%, 38% and 3% respectively. POSIT Marketplace connects eight large dark liquidity pools in Asia Pacific. Q2 volumes crossed in POSIT Marketplace in Asia Pacific were around three times the level of Q1, with average price improvement of 13 bps per trade year to date.
“POSIT Marketplace volumes are increasing even though market turnover was generally falling or stable in May/June for the key markets of Australia and Hong Kong where POSIT Marketplace has been running.
We attribute this to the higher number of clients both in Asia Pacific and internationally wanting to access dark liquidity as part of their hunt for liquidity and price improvement in Asia's liquidity-challenged markets,” said Clare Rowsell, ITG's head of client relationship management & marketing, Asia Pacific.
A complicating factor is that what constitutes large, mid and small cap varies across markets. In Australia, Hong Kong and Japan, ITG sets the minimum threshold for large caps at US$10 billion and small caps at US$1 billion and below. In Singapore, large caps are above US$5 billion while small caps are below US$250 million. In Korea, large caps are above US$5 billion while small caps are below US$100 million. In Taiwan, the upper and lower mid-cap boundaries are US$1.5 billion and US$100 million respectively.
ITG's Liquidity Barometer also noted that of the six markets covered, Singapore showed the most significant decline in costs in the first half. “In Singapore, we already had some changes that took effect, such as the changes in minimum tick size which directly affect the spreads,” Gefen noted.
Weighted average transaction costs across developed Asia stood at 51bps in June 2011, down from around 65bps a year ago. “I expect the August transaction cost numbers to be higher because of the volatility. But the magnitude of the current volatility is not to the level as the global financial crisis, so I would expect it to have more of an effect on costs than, say, the fairly localised effect of the Japan earthquake, but not a spike in trading costs to the levels seen during the global financial crisis,” Gefen noted.
Author: Jill Wong