Credit Suisse has started offering a groundbreaking counterparty-selection tool already available in Europe and the US to Asia-based users of its electronic trade-matching engine, Crossfinder.
The Swiss bank rolled out the service to clients – such as long-only asset managers and large hedge funds – in Australia and Japan last week and in Hong Kong and Singapore in early April.
The aim of the 'advanced order protection' (AOP) is to assuage fears raised by investors – and also noted by regulators and exchanges – over 'predatory' users of alternative electronic trading systems (ATSs) such as dark pools.
The system uses an algorithm to quantitatively examine trading behaviour and puts traders in one of three categories: 'contributors’, which passively place flow and wait for traders to take it; ‘neutrals’, clients who win short-term alpha on some trades and lose on others, essentially evening out; and ‘predators’, or purely opportunistic traders. Clients can trade against any category or categories.
(SeeAsianInvestor's March 2011 Trading Asian Equities supplement for more details of how the system works.)
Asia-based asset managers are starting to consider whether they should ‘opt out’ of trading with certain types of counterparty – a practice that their peers in the US and Europe are more familiar with.
Two of the most frequently cited types of equity flow that worry institutional investors are high-frequency traders and banks' proprietary trading desks, because of their perceived ability to potentially 'game' other traders. Fund managers such as Fidelity International and RCM say they avoid pools with significant HFT activity.
Matt Saul, Asia ex-Japan head trader at Fidelity International in Hong Kong, welcomes AOP as a positive step.
“We’ll look at the data," he says. "I don’t know if it will then cause us to change our behaviour, but it’s good to see they’re measuring and monitoring these things in a systematic way. In the past you haven’t really been aware of how things are happening in dark pools.”
Saul says the algo will give clients more comfort as to who they are interacting with. “If that then creates more liquidity in dark pools, that’s great for us and for all investors,” he adds.
He points out that there are other firms making moves to improve liquidity in dark pools – for example, aggregating less common, uncorrelated types of flow such as private-wealth clients or derivatives-hedging exposure.
This is another way of boosting liquidity, notes Saul, since it means that not all the participants are chasing the same sort of assets. But Credit Suisse’s approach is one of the most organised and structured in terms of what the broker-dealer will do with the data or will allow the client to do with it, he says.
Murat Atamer, head of products in Credit Suisse's advanced execution services unit in Hong Kong, says: “Traders like their experience in Crossfinder, but they want to know we are checking the pools and imposing risk management controls – and they want options."
Still, despite concerns over HFT flow, such traders are by all accounts relatively inactive in Asia, as it’s harder for them to turn a profit in the region, due to factors such as higher minimum order sizes and the absence of flash orders. In fact, says Atamer, Crossfinder is on the bank's traditional architecture platform, so it's not fast enough for HFTs.
Nevertheless, he says, “clients want to be informed on what type of trading behaviour is in the pools – what type of fills, whether they are good or bad.” But no-one has yet asked to be cut off from certain flow, he notes, adding: “In Asia, especially, you need as much liquidity as possible.”
Credit Suisse is focusing on strengthening the platform in the four key electronic-trading markets: Australia, Hong Kong, Japan and Singapore. It will then look at expanding into other jurisdictions, depending on the regulatory environment and client demand. “If we see enough demand, we will definitely allocate enough resources,” says Atamer.
Crossfinder is one of the frontrunners in terms of crossing venues in Asia-Pacific, with daily average volumes of $350 million for the region.