While the trend toward dark pool linkages is picking up in Asia, buy-side block-trading venue Liquidnet has thus far not felt the need to jump on the bandwagon given an average execution size of US$1.3 million. However, the firm does not rule out the possibility of linking to other dark pools when the right opportunities arise, said Lee Porter, CEO, Liquidnet Asia.
“Right now we don't connect with other dark pools in this region, but we do connect with other sell-side participants in Europe and US. It's certainly something that we'll take a look at, if its right for us and our clients in Asia. Given the size of the liquidity pool that we have, which can get up to US$10 billion a day across the region, that's very sizable. Any connection needs to be mutually beneficial for both parties,” Porter said.
Besides its crossing network where buy-side firms negotiate large orders anonymously between themselves, with Liquidnet's agency-only trading desk providing order handling and execution services, the firm also provides its Supernatural service in the US and Europe. This allows the firm's buy-side members to access liquidity from external sources such as brokers, exchanges and multilateral trading facilities (MTFs), which Liquidnet terms streaming liquidity participants (SLPs). European SLPs include MTFs Chi-X Europe, NYSE Arca Europe, BATS Europe and Nasdaq OMX Europe, exchange NYSE Euronext and brokers Instinet, Credit Suisse, Deutsche Bank, Sanford Bernstein, CA Cheuvreux.
The main difference to clients between using Supernatural and other liquidity aggregation services is that Liquidnet allows them to control what liquidity to access and how aggressively to trade using their desktop applications or Liquidnet's agency-only trading desk. Liquidnet members could, for example, start filling a block order using Supernatural while waiting for a match in the main buy-side-only pool.
“Linking to other dark pools is what you're finding some of the aggregators are doing in Asia right now,” said Porter said. “Supernatural is somewhat different. The order would reside in Liquidnet, so the client would anonymously expose the rump of the order to Liquidnet's natural pool waiting for other natural blocks to transact with, and if they wish to, they've got a range of different strategies whereby they can choose to seek other types of liquidity. They can either go to other dark pools directly, or go to an aggregator to hit multiple dark pools simultaneously, and then depending on how aggressive they want to be and what their strategy is, they can also decide whether to go directly to the exchange, or in the US and Europe, they can go to competing lit venues.”
Porter says models that have proved successful in other markets will inevitably be considered for their suitability in Asia too. “As our various different models evolve in different markets, we'll be looking to bring elements of those to this region as well. We're exploring bits and pieces of that already. Our focus in this region is on building our natural pool and building up our core base of liquidity. We're getting to the point now where our models are mature enough and we've got enough members and liquidity and we can start layering these other products and we're starting to look at that now,” he said.
In January, Liquidnet partnered with Swiss market operator SIX Group to offer its buy-side customers the option of interacting with sell-side block liquidity from the exchange's members.
The trend towards liquidity aggregation, particularly in Asia where the buy-side is up against a constant struggle to find liquidity in large size for often illiquid stocks, is driven by the need of dark pool operators to achieve critical mass. Global agency broker Instinet released its Nighthawk aggregation algorithm in Asia last year and has announced a number of liquidity-sharing agreements that provide its clients with access to TORA Crosspoint, ITG's POSIT, Nomura's NX and Credit Suisse's Crossfinder. Instinet was also one several brokers to have signed up to access the Chi-East regional dark pool.
Other recent examples of liquidity aggregation services include TORA Crosspoint, initially launched in Japan by agency broker and technology provider 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 2010.
According to Murat Atamer, head of AES product, Asia Pacific, at Credit Suisse, a client who places an order via Crossfinder+, the firm's dark-only algorithm, will have a better chance of getting a cross than an aggregator would in Crossfinder. “That’s because we shadow larger portions and achieve better priority with our algorithm than an aggregator does into Crossfinder. In terms of aggregation tools, we have had clients use them and we continue to have clients send orders to us. In Europe, it's a fragmented market; there are multiple pools and they are all sizable pools. But in Asia, you have very few dark pools that have real liquidity in them. On average we cross US$400 million regularly every day,” Atamer said. “That said, the client could make up the difference in other dark pools. Given that Crossfinder is one of only a limited number of liquid dark pools, it could be more of a hindrance using an aggregator at the moment than if you send an order directly. It is not like it is in Europe, where you can send an order and there a large number of big pools out there. This will change over time as other dark pools grow.
Some market participants have predicted that client demand will encourage large investment banks to join agency brokers in embracing liquidity aggregation in Asia. Atamer concurs. “We see that happening in other markets. We connect to other bulge bracket firms' pools in other regions. At some point, would Asia move in that direction? We wouldn't rule it out,” he said.
Chris Jenkins, Tora's managing director, Asia Pacific, feels independent agency brokers will always have a critical role to play in the process of dark liquidity aggregation. “The key thing is independence. You may have one or two brokers connecting to each other but there are always corporate reasons why they won't all connect together. You do need an independent entity in the middle to take an independent view because the thing about aggregation isn't just about who you connect but how you search for liquidity. So a smart order router has to be genuinely smart and look for liquidity on an even keel. We look at it from a completely neutral basis, and the only driver for us is whether liquidity is there and if it's going to be a good match for the client,” he said.
Author: Jill Wong