Investment Technology Group (ITG) will today launch Posit Marketplace, an aggregator of dark pools, for Hong Kong equities. The broker and financial technology firm says Posit will cut trading costs, and the vendor expects to roll out similar structures in Australia and Japan over the next 12 months.
Alternative marketplaces and 'dark pools' are becoming buzzwords for improving trading efficiency in Asia, following in the footsteps of similar initiatives in Europe and the US. Initiatives such as Chi-East and the joint-venture dark pool between Singapore Exchange and Chi-X Global are expected to fragment markets, leading buy-side traders to search for ways to source different pools of liquidity in an efficient way.
Unlike Chi-East, which plans to exclusively serve broker-dealers, Posit can be used by investors as well as by the sell side. Posit is also a dark pool and Marketplace extends it to the internal crossing engines of two banks, with more expected to come on line, says Clare Rowsell, head of client relationship management at ITG Asia in Hong Kong. She would not reveal the names of the banks.
Marketplace is rather like a smart-order router (SOR), in that it connects investors to multiple sources of liquidity. The difference is that SORs use algorithms to figure out how trades should be divvied up among venues and which strategies to use to execute, and they may channel trades to 'lit' as well as dark venues. Marketplace is simpler; it expands Posit to include other dark pools, and users can search for matching trade offers.
The platform will reduce buy-side trading expenses by anonymously linking buyers and sellers of equities. In terms of spreads, it will aim to cross orders at the mid-point or better and save half the bid/offer spread on each trade. A further benefit of dark pools is that pre-trade anonymity is maintained, Rowsell says, which cuts market-impact costs. Thirdly, the system can reduce delay costs.
By aggregating liquidity across a range of dark destinations, the new marketplace increases the likelihood and frequency of orders being filled.
In addition, some big orders, which would have not traded otherwise on the open market, will go into anonymous dark pools. ITG reports trading costs in developed Asia ex-Japan are about two-thirds higher than US trading costs.
Analysis of more than 20 million trades shows that dark aggregation has delivered up to 66% cost savings on US trades. The average trading cost for orders sent to market being 12bp while for orders exposed to dark aggregation it was 4bp.
Given different market microstructure issues such as lack of many dark venues and exchange restrictions, ITG does not expect to see the same level of cost reductions for Asian trades in the early stages, says Rowsell.
But she estimates huge savings if there is only a 33% reduction in costs, for example. ITG's data for fourth-quarter 2009 on implementation shortfall costs was as follows: Hong Kong (96bp), Australia (56bp) and Japan (45bp). A one-third reduction following a cost saving for a fund trading $100 million in those markets translates to: Hong Kong (31bp) or more than $300,000; Australia (18bp) or more than $180,000; and Japan (15bp) or more than $150,000.
Sounds good, but why has someone else not done it? "We are independent," says Rowsell, "and we have the technology and the long-running investment in technology, which is needed."