Dark pools see trade surge amid shift back into stocks
US operator Liquidnet records 20pc increase in its Asian business to top US$5b in the first quarter as investors switch from bonds
Demand for so-called dark pool trading has increased this year, with investors shifting back into stocks from bonds, according to Lee Porter, the Asia-Pacific head of dark pool operator Liquidnet.
Porter said Liquidnet, headquartered in New York with a trading network in 42 markets worldwide, including 10 in Asia, found its volume in the Asia-Pacific had been rising this year because of increasing interest in stocks.
Liquidnet's trades in Asia exceeded US$5 billion in the first quarter, representing a 20 per cent increase from the previous quarter. Hong Kong was the largest market in Asia, Porter said.
In Europe, its total trade rose 64.7 per cent in the same period to US$22.6 billion.
Porter said that last year investors were more into fixed-income products amid the uncertainty in the stock market.
"Investors did not want to take too much risk, which explains why bonds and fixed-income products were popular. But we have seen a change this year, with investors turning their gaze back on stocks," he said.
Dark pools are electronic platforms that have emerged in recent years in advanced markets. They allow traders to buy or sell large blocks of shares without having to disclose their identities, the volumes or prices, as opposed to requirements at traditional exchanges.
Porter said dark pools were mainly used by institutional investors and pension funds while traditional stock exchanges such as Hong Kong Exchanges and Clearing drew more retail investors.
As such, he said, while the HKEx saw its trading volume drop more than 20 per cent last year, Liquidnet's kept growing as institutional investors did not quit the market.
"I believe it was mainly the retail investors who avoided trading in stocks last year, so it affected the stock exchanges more than dark pool operators," he said.
Porter is upbeat on the outlook for dark pools in Asia as he believes the region's high economic growth would increase demand for fund, pension and insurance products while the investment managers of these products would prefer to trade with dark pools, which are tailor-made for institutional investors.
Dark pools are popular with pension funds and asset managers as the anonymity allows them to keep their strategies hidden from the public eye, cut transaction costs and avoid setting off unwanted price movements.
Porter said the challenges for dark pool operators was that globally, there had been proposals for more regulation of their operations after traditional exchanges worldwide called for curbs to increase their transparency.
Securities and Futures Commission chairman Carlson Tong Ka-shing has said the local regulator is studying ways to tighten the regulation of dark pools and a consultation paper would be released this year.
"I believe Hong Kong would follow the international trend and consider what is being done in Australia and Canada on dark pools," Porter said.
"We hope the regulator in Hong Kong would adopt an approach that, while adding transparency in the market, would also help the development of dark pools."