SGX dark pool to bring HKEx extra business

PUBLISHED : Saturday, 09 October, 2010, 12:00am
UPDATED : Saturday, 09 October, 2010, 12:00am

Singapore Exchange's bombshell announcement last year that it was launching the world's first exchange-backed dark pool to trade shares - including Hong Kong equities - sent shockwaves through this city's business circles.

Financial institutions worried that they would lose business to the Lion City. But the opposite appears to be the case: Hong Kong's long-time wannabe rival is actually going to bring business to the city when the platform launches next month.

A dark pool is an electronic trading platform that allows investors to trade large amounts of stock without having to reveal their identities, the trading volumes or prices.

The dozen or so dark pools operated by stockbrokers or independent companies in Hong Kong have become increasingly popular with pension funds and asset managers because they allow them to keep their strategies hidden, cut transaction costs and avoid setting off price movements.

Many saw Singapore Exchange's decision to team up with a dark-pool operator, Chi-X Global, to launch Chi-East to trade Singapore, Hong Kong, Japanese and Australian shares as a threat to Hong Kong's business.

But Chi-East said this week that its participants, including banks and brokers, would use Hong Kong Exchanges and Clearing to settle all trades in Hong Kong stocks on its platform.

Once the trade is matched on Chi-East, the trade will be reported on HKEx by members of the local bourse. The participants will pay clearing fees to the local bourse and they will have to pay Hong Kong stamp duty on stock trades.

Ned Phillips, chief executive of Chi-East, said its dark pool was not intended to take business away from other traditional exchanges but would actually add business. 'We are not a competitor. Chi-East complements [other markets] by bringing liquidity, and this will bring business to Hong Kong Exchanges and Clearing,' Phillips said. 'We are offering a platform for brokers to trade large transactions more effectively and minimising market impact,' he said, adding that this would cut transaction costs.

'In regard to transparency, after the trade is matched, we will report via Bloomberg and Reuters the price and volume, so we are not without transparency,' he said.

But if the trades took place in the traditional exchanges, other traders might bet against them, affecting the market and liquidity.

Phillips said Chi-East has approval from the Singapore Monetary Authority to start operating. It plans to introduce the platform next month for banks and brokers to trade all stocks in Singapore and major stocks in the benchmark indices of Hong Kong, Japan and Australia.

Singapore stocks will be settled by the Singapore Exchange, and London-based independent clearing houses would settle the Australian and Japanese stocks.

Chi-East is sticking to traditional exchanges in Hong Kong and Singapore because their infrastructure was the most efficient available service, Phillips added.

Phillips said that in the United States around 8 to 10 per cent of traders used dark pools, and 3 to 5 per cent in Europe. Brokers believe the figure for Asia is less than 2 per cent, but Phillips predicts it will take off.

Large cross trades used to be done by brokers over the phone in the old days, but new technology means they can do it electronically using the dark pool network, increasing the efficiency of the market, he said. 'Many believe dark pools are competitors with traditional exchanges, but in fact Chi-East shows that the two can work well together. Singapore Exchange has a good reputation and a well developed data centre and infrastructure, while Chi-X has the technology in dark pool operations,' Phillips said. 'I believe there will be further similar co-operation in future.'

Competition between dark pools and traditional exchanges has heated up in the US and Europe where regulations allow dark pools to run independently of exchanges.

In Hong Kong and Asia, however, most markets require dark pools to be a member of or to link up with a traditional exchange member, so they usually operate like brokerages.

The HKEx is downplaying the development. 'We noted the development (of Chi-East) and will continue to monitor the exchange environment in this region as well as the global trend,' a spokesman said. 'We will continue to ensure our markets are competitive in providing services to market participants, including issuers and investors.'

Christopher Cheung Wah-fung, chairman of the Hong Kong Securities Professionals Association, said the Hong Kong stock market's daily turnover was more than HK$100 billion, which provided deep liquidity for settlement and would be hard for overseas exchanges or dark-pool operators to rival.

'HKEx could also consider introducing its own version of the dark pool, but I think it should not be a priority. It should first introduce yuan products and extend its trading hours as these measures would bring more business to Hong Kong,' Cheung said.