Dark Pools Grow in Asia

While usage of dark pools for trading has grown slowly over the past several years, new catalysts for expansion and launches of the service by more companies are increasing the pace of development.

Consulting firm Celent expects off-exchange trading to go from just 1% of trading volume in 2009 to 5% of trading volume region-wide in Asia by 2012, for example, and Aite Group forecasts even faster growth, towards a level of 20% of trades on alternative trading systems by 2012. While it’s still low compared to Europe and the US, where 30% and 42% respectively of trades take place off the exchanges, and not all of the off-exchange volume in Asia will be in dark pools, either level is still a significant jump. Demand by traders, service providers expanding their reach, more acceptance by exchanges and the rebound in equity markets are among the drivers of the change. The launch of the first exchange-backed dark pool Singapore Exchange (SGX) later this year is yet another catalyst for expansion.

Dark pools offer traders and investors the advantage of anonymity about their intention to trade, which can reduce the market impact of trading in a large block of shares, and they can also lower costs. The trades still meet regulatory requirements since they are reported to exchanges right after they are concluded.

The joint venture between SGX and Chi-X, announced in August 2009 and planned for mid-2010, is designed to increase the attractiveness of listing shares in Singapore. SGX executive vice president Chew Sutat told Asian Investor last year that SGX is also working to overcome regulatory hurdles so it can extend the JV to enable it to trade in other countries in the region. This could be part of the reason why more exchanges in the region are looking more seriously at dark pools.

The Hong Kong Exchange (HKEx) has shifted from opposition and criticism by chairman Ronald Arculli in December last year, when he said they could create systemic risk and a playing field that is no longer level, to its COO saying in March that it is considering offering the facilities. To underscore the shift, ITG launched its Posit Marketplace with great fanfare in March for trading in Hong Kong and said expects to roll it out next to Australia and Japan. In Hong Kong, about 1% of market volume is currently in dark pools.

Dark pools account for an estimated 1% of trades in Japan, and some players, such as Credit Suisse, have been operating dark pools for years. The market is expanding there, too. Citi announced in March that it had launched dark pool trading.

While regulatory approval in Australia is still pending, there’s a push to allow it into that market, too. Dark pools look like they will expand to other countries, too, as service providers push into new markets. Liquidnet, for example, has said it would like to expand into Indonesia, Malaysia and New Zealand as soon as the second half of 2010.

While regulators focus on how to make sure there are level playing fields and sufficient transparency for trading in dark pools, investors are increasingly looking forward to the benefits of potentially lower costs and easier trades that dark pools provide. Whether they reach 5% or 20% of volume in 2012, they’ll still have a significant impact on markets around the region.

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