Deutsche Bank’s internal Hong Kong dark pool goes live today, and will be known as the Deutsche Bank Automated Trading System (DBATS).
As with other dark pools -- which are basically off-exchange crossing networks -- the trading venue aims to ensure clients can access sufficient liquidity while preserving their anonymity. It will run concurrently with a dark liquidity-seeking algorithm, SuperX, in which clients will in time be able to access other Asian dark pools.
DBATS has run for several months internally and with pilot clients. The performance during this period was shown to reduce implicit execution costs, says Mark Davis, Hong Kong-based head of equity and equity-linked execution for the Asia-Pacific region.
“Compared to the US and Europe, spread costs in Asia are relatively high, with an average of 18-20 basis points for Hong Kong trades,” he says. "Trading in DBATS aims to give clients access to greater liquidity, reduce market impact and improve trading efficiency."
Equity execution continues to evolve, adds Davis, and electronic execution of trades in Asia has expanded significantly over the past 12 months. At the same time, Deutsche Bank has been investing heavily in its equities business in Asia and globally, particularly in its sales and execution capabilities.
As well as strengthening coverage of its electronic trading platform, the bank has added two managing directors and 12 directors to its Asian execution team in the past 12 months.
Both DBATS and SuperX represent considerable investments in electronic execution services. The products provide access to Hong Kong equities and are available either through the equity sales desk, portfolio trading desk or Autobahn Equity, an electronic equity-trading platform.
Feedback on Deutsche's electronic offering has been very positive, says Davis, with clients eager to enhance their access to liquidity.
The bank launched the SuperX algorithm in the US and Europe in the second quarter and plans to provide access to other dark pools through SuperX over the coming months.
As reported by AsianInvestor late last year, Ronald Arculli, chairman of Hong Kong Exchanges & Clearing, has criticised dark pools for potentially creating market-surveillance difficulties, citing figures that dark pools account for 12% of market trades in the US.
But Asia is a very different playing field to that of the US and Europe, says Greg Lee, Hong Kong-based Asia head of Autobahn Equity at Deutsche Bank. “It’s worth noting that the regulatory framework in Asia is vastly different,” he adds. “You still have to report all trades to HKEx, so you do not have the same fragmentation issues that are being discussed in other markets.”
But what about concerns that dark pools operating without central counterparties may make markets less stable?
"The dark pool is a technology to match orders at improved prices -- it doesn't change the counterparty you're facing," says Lee. "Orders still get reported to the exchange and cleared through CCASS [Hong Kong's Central Clearing and Settlement System]. This is an automation of the established OTC crossing process in Hong Kong."
He adds that Deutsche hopes the SuperX algorithm will be Asia’s leading source of dark liquidity and is confident of robust activity on DBATS in the first week.
SuperX uses a quantitative approach to anti-gaming to prevent client orders being traded at artificially adverse prices. The algorithm also aims to improve clients’ access to liquidity via a pool ranking model that ranks liquidity on a real-time and historic basis to determine optimal dark sources for a given order; a smart allocation model that balances optimal fill probability versus the total cost of execution; and performance reports that allow clients to monitor the efficiency of their execution.