Even as a Singapore-based dark pool operator trading Hong Kong stocks shuts this week, the local exchange's war against these new trading rivals is far from over as other electronic platforms are still going strong.
Chi-East, a dark pool operator jointly owned by Singapore Exchange and Chi-X Global that allows investors to trade Hong Kong, Singapore, Japanese and Australian shares, will close down after the last trading day this Thursday, after 18 months of operation. Trading volumes fell short of its expectations, its website said.
When plans for Chi-East were announced in August 2009, many market analysts predicted it would take away 5 per cent of the trading volume of the Hong Kong Exchanges and Clearing. Chi-East recorded a turnover of just US$71.06 million from July to September. Although an improvement on the US$23.5 million it saw during the April-June quarter last year, it was puny compared to HKEx's average daily turnover of US$8.97 billion last year.
A dark pool is an electronic trading platform that allows traders to buy or sell large blocks of shares without having to disclose their identity, the volume or prices, as opposed to traditional exchanges' requirements. These platforms are operated by brokers or independent companies and have become popular with pension funds and asset managers as the anonymity allows them to keep their strategies hidden from public eye, cut transaction costs and avoid setting off unwanted price movements.
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 Australia, these parallel exchanges now represent 30 per cent of the total stock turnover, 35 per cent in the US and 40 per cent in Europe. Asia, where regulations still protect traditional bourses, dark pools have been slower to take off, accounting for about 3 per cent of the turnover.
David Jenkins, head of business development of Fidessa, a technology firm catering to dark pools and brokers, said Chi-East's business model was different from other players. It was a pan-Asian platform, with different settlement and clearing arrangements. 'This made the platform more expensive and complicated, making it harder to attract members,' he said. 'Chi-East's failure should not be seen as the end of the dark pool business. Some dark pools are very popular as they offer advantages for institutional investors.'
World Federation of Exchanges chairman Ronald Arculli, who is also a HKEx director, told the South China Morning Post the local bourse and other exchanges have to fight on against dark pools. 'I do not think the war is over. Although Chi-East will be shut down, many dark pools are still in business. We still have a lot of work to do in drawing the attention of international regulators to the need to create a level playing field for traditional exchanges and dark pools,' Arculli said.