The First Exchange-Backed Dark Pool in Asia-Pacific
The problems in trading equities in Asia are fragmentation and monopolisation. The region breaks into a number of different markets, with each with their own regulations and structures. It is common to be monopolised by a single stock exchange. The emergence of alternative trading venue including dark pool is viewed as a threat by stock exchanges.
On 12 August 2009, it became a turning point when the Singapore Exchange (“SGX”) collaborated with a US market technology company, Chi-X to develop and launch the first exchange-backed dark pool in the Asia-Pacific region. This 50:50 joint venture aims to initially offer block crossing facilities for equities listed on SGX, and on an offshore basis for the Australia, Hong Kong and Japan exchanges.
Basically, dark pool refers to a non-displayed trading platform for very large share trades between institutional investors. On typical bourses, the market will quickly learn of large deals as share trading orders go into the system which would then affect the stock prices significantly. With dark pool, the trading of block of shares with prices will be made public only after trades are complete, thus, reducing the market impact and transaction costs.
Dark pools are common in US and Europe. As dark pools grow, critics believe that they may come to a point where the price on the open exchanges will not be sufficiently informative and will hurt the public investors and eventual parties on these dark pools because the price may no longer be representative of the true value of the shares. Owing to less-stringent requirements, dark pools are perceived as less scrutable and lack of transparency. Emerging risks posed by dark pools have prompted regulators to look onto the necessary regulatory actions to respond to the potential investor protection and market integrity.
In Asia, there are several broker-led dark pools from Goldman Sachs, Credit Suisse, CLSA, etc. In contrast, SGX/Chi-X dark pool is neutral, independent and not linked to any brokerages. SGX/Chi-X dark pool will act as an “aggregator” platform linking broker-led dark pools and traditional brokerages. This will attract new liquidity into the region, benefiting both the institutional investors and retail investors. Other than equities, SGX plans to extend its products to depository receipts and exchange-traded funds.
The SGX/Chi-X dark pool will operate with appropriate regulatory approvals and controls, reporting and settlement systems, and compliance standards. Once the dark pool commences operations, it can be extended to other Asian markets. The main concern is the regulatory side remains uncertain because of different rules on foreign ownerships and market access. SGX may face the difficulty of getting other countries’ jurisdictions to amend some regulations and various technical issues.
As a regulator, SGX will come under pressure to ensure that the new trading system is fair to all investors. SGX has to find way to retain oversight of the anonymous trades conducted within the dark pool. Dark pools play a significant role to evolve and grow the Asian capital markets, but they shall not left with their own device. Regulators shall be kept privately informed of all significant trades before they occur given the trend towards greater transparency of financial markets.
SGX/Chi-X dark pool sets to commence operations and trading in the first half of 2010.
Written by
Mr Gerald Cheong (pictured) and
Mr Nicholas Chang
Mr Gerald Cheong
Corporate Finance Manager
Ph: (65) 6322-2232
Fax: (65) 6534-0833
E-mail: geraldcheong@loopartners.com.sg
and
Mr Nicholas Chang
Corporate Finance Executive
Ph: (65) 6322-2236
Fax: (65) 6534-0833
E-mail: nicholaschang@loopartners.com.sg
Loo & Partners LLP
88 Amoy Street, Level Three
Singapore 069907