* ASX confident regulator will limit scope of dark pools
By Kevin Lim and Adrian Bathgate
SINGAPORE/WELLINGTON, Aug 17 (Reuters) - "Dark pools" and
other alternative trading systems are not as big a threat to
Asia's bourses as they are for their western counterparts,
given regulators' reluctance to grant them a free reign and due
to structural differences in markets.
Dark pools, so named because they represent large pools of
"buy" and "sell" orders not visible to regular investors,
operate relatively freely and match billions of dollars in
stock transactions each day in the west.
But in Asia, where stock exchanges are often seen as
national assets, regulators are likely to curb their activities
to protect incumbents as well as ensure markets remain wholly
"Emerging market regulators have bad memories about the
Asian financial crisis and are concerned about speculators,"
said Richard Kang, CIO at New York-based Emerging Global
Advisors, who manages about $120 million in exchange-traded
"Liquidity pools, dark pools, alternative trading systems
etc are still relatively new...they (Asian regulators) will
wait for cues from the U.S. to see if dark pools are beneficial
or a burden to their capital markets."
Dark-pool operators acknowledge Asian markets will be
harder to crack, but they remain keen to expand in the region
where they account for just 1-3 percent of trades in the
larger, more liquid markets and close to zero in smaller
Chi-X, a unit of Nomura and the biggest dark pool operator
in Europe, last month launched a service in Japan and has plans
to do the same in Singapore and Australia. Tora, a trading
technology firm part-owned by Goldman Sachs, recently announced
plans to set up a pan-Asian dark pool.
CHI-X says it hopes to gain 5-10 percent share of the
Bourse operators such as Hong Kong Exchanges and Clearing
and Singapore Exchange also benefit from market structures that
make it difficult for dark pools to bypass them when clearing
trades, ensuring they will continue to earn fees regardless of
how orders are matched.
Even in Australia, where the government has decided to
expose ASX to competition from as early as next year, dark
pools can expect strong resistance from the incumbent operator.
To fend off competition, the ASX has taken steps, including
lowering fees for matching and settling stocks trades and the
creation of its own dark-pool facility that traders can use to
key in orders worth more than A$1 million ($913,200).
"You may not see the same impact in this market as you have
in other markets," said Shane Delphine, an investment manager
at Karara Capital in Melbourne, referring to the dark pools.
Dark pools let brokers and fund managers place and match
large orders anonymously to avoid influencing the share price.
Matched trades are subsequently shown on the stock exchange
while unmet orders remain invisible to other investors.
In the United States, dark pools and other alternative
platforms account for about 22 percent of all shares traded.
And in the UK, the London Stock Exchange has lost more than a
quarter of the market to alternative platforms, in particular
NYSE, LSE and many western exchanges have since set up
their own dark pools to fend off competition.
Chi-X has secured a provisional licence to operate in
Australia once the rules regulating new entrants are ready.
ASX shares have fallen 16 percent since the start of 2010
on concerns margins will fall and that it would lose market
share to new entrants, underperforming the around 10 percent
decline in SGX and 8 percent fall in HKEx, which have both lost
ground amid the global drop in stock trading volumes.
Most analysts regard ASX and the Tokyo Stock Exchange,
which is unlisted, as the two Asian bourses that are most
vulnerable to competition from dark pools because of their high
trading volumes and relatively liberal regulatory environments.
Celent, a financial services consultancy, estimates dark
pools could, in the next 3-4 years, grow their market share in
these markets to as much as 5 percent from the current 1
percent, well below the 30 percent levels in some European
Richard Murphy, ASX's general manager for equity markets,
said regulators will not allow dark pools to make similar
inroads in Australia as they did in North America and Europe.
"I don't see dark pools per se being a threat to ASX
because it's too much of a threat to the concept of displayed,
centralised markets for regulators to let them get out of
The Australian Securities and Investment Commission (ASIC)
declined to comment.
Dark-pool operators also face obstacles in Hong Kong, where
operators of alternative trading services are required by law
to report and clear their trades through HKEx, and in Singapore
where shares of listed companies are held by a central
depositary owned and managed by SGX.
This means that while dark pools can earn fees from
matching orders, they cannot make money from clearing and
settling trades either directly or by outsourcing the service
to third parties.
"In Europe, there is competition among different clearing
houses unlike in Asia where the clearing houses are linked to
the exchanges," said Lee Porter, Hong Kong-based CEO for Asia
at Liquidnet, a large U.S.-based dark pool operator.
For smaller Asian bourses such as Bursa Malaysia, their
relatively thin trading volumes and Asia's fragmented stock
markets may actually insulate them from competition.
"Asia is still 12-13 different markets with different
rules, different regulations and different currencies. The
market structure here does not allow one to trade all of Asia
at once," said Ned Phillips, CEO of Chi-East, a venture of
Chi-X and SGX.
"In Europe, charges for alternative trading systems are
already below a basis point so you need to do a lot of
liquidity. It would be challenging for dark pools to enter a
($1=1.095 Australian Dollar)
(Editing by Muralikumar Anantharaman)