Dark pools are becoming the rage in Asia.
We mean, of course, dark liquidity pools, which are crossing networks (alternative electronic trading systems) offered by prime brokers to shield trades from prying eyes. Trades executed via a dark pool are not displayed on order books. The pool allows institutional investors to move large blocks without tipping off the public as to price, volume or trader. They are reported as OTC trades on national consolidated tapes.
The Wall Street Journal reports that Citigroup Inc. is beefing up its Asian electronic executions services team by about 30%-50% this year, signaling growing interest in electronic trading and dark pools.
The bank recently hired Ian Smith, the former director of advanced execution services for Credit Suisse Group in Asia, to be pan-Asia head of algorithmic product, and hired two executives to handle sales and trading in Japan and Australia. Smith will start in his new post in July. Citigroup plans to hire three to five more executives later this year, mostly in sales and trading.
“We have seen strong growth and volumes in Australia and Hong Kong–with a record month in May for Citi Match in Australia–and also good flows already coming through our new offering in Japan,” said Ben Valentine, a director at Citigroup in Hong Kong who runs Asia Pacific electronic execution sales.
Citigroup’s dark pool, Citi Match, recorded a record volume of A$1.53 billion in Australia last month. The firm launched Citi Match in Japan two months ago. Dark pools are alternative trading platforms that allow buyers and sellers to place orders anonymously.
As electronic trading and dark pools become more popular in Asia, brokers and independent trading platforms such as Liquidnet are seeing strong growth. Currently, an estimated 1% of trades in Hong Kong are conducted through dark pools, compared with 3.5%-4% in Japan and 4%-4.5% in Europe.
With the growing number of dark pools appearing in the region, several players are working to link the the various platforms. Tora Holdings Ltd. said last week it would expand its dark-pool aggregator, Tora Crosspoint, to include dark pools in Hong Kong, Singapore and Australia later this year. Another one is Chi-East Pte Ltd., a joint venture between Chi-X and Singapore’s stock-exchange operator, which is looking to link dark pools in Japan, Hong Kong, Singapore and Australia later this year.
Valentine said the firm will link its Citi Match clients to Chi-East later this year.
Dark-pool aggregators are already well established in the U.S. and Europe, but have been slow to appear in Asia, in part because of the region’s numerous jurisdictions, competition concerns and regulatory hurdles.
Asian regulators are keying in on the rise of alternative trading platforms in the region and industry watchers anticipate increased regulation to come. The Hong Kong stock exchange, for instance, will require brokers to flag trades that were made through dark pools later this year. Brokers currently must report trades to the exchange but don’t need to flag which ones were made through a dark pool.