Dark Pools Boost Share of Japan Equity Trades, Bourse Data Show

The share of Japanese equity trades taking place in dark pools, or private systems that don’t display prices publicly, is growing, according to data from the Tokyo Stock Exchange’s alternative share trading platform.

The share of Japanese stocks traded on the Tokyo Stock Exchange Trading Network, or Tostnet, increased to 10 percent in November from 7 percent in March, when regulators first required dark pools to connect to the system, the bourse said. Daiwa Securities Capital Markets is among the operators of dark pools that uses Tostnet, according to the brokerage’s Global Head of Electronic Trading Services Punit Mittal.

“The increase in Tostnet’s share of trades shows use of dark pools is growing in Japan,” said Lee Porter, Hong Kong-based managing director for Liquidnet Holdings Inc.’s Asian dark pool operations. “Most of the major broker-dealers have now deployed their dark pools in Japan. You are now seeing the Japanese domestic brokers doing the same too, so clearly there is appetite.”

Japan’s Financial Services Agency in March ruled dark pools must register as proprietary trading systems or connect to financial markets via systems such as Tostnet. Foreign brokers including Credit Suisse, Citigroup and Morgan Stanley operate dark pools in Japan alongside domestic operators like Daiwa Securities. Tostnet trades accounted for 6.6 percent of domestic share volume at the Tokyo exchange in 2009 and 6.2 percent in 2008, according to bourse data.

Income May Drop

The portion of trades handled outside of public exchanges in the Asia-Pacific region is forecast to rise to 5 percent of transactions within three years from about 2 percent this year, John Feng, New York-based managing director of research company Greenwich Associates, said.

Tostnet’s increased share “signals more dark pools exist here,” Tsuyoshi Masuda, deputy director of the stock-market department at the exchange, said. The exchange’s “income may drop if more money shifts to dark pools from the auction as Tostnet’s fees are cheaper than those for auction trades.”

The commission for Tostnet is about one-seventh of that charged for regular auction trades, according to TSE. The alternative trading system was launched in 1998 as a venue for block share transactions after regular trading hours. The service was re-established as an equities and derivatives platform in 2008.

“As traders and their trading needs become more sophisticated they will need to broaden their execution options,” Porter said. “You will see a gradual increase in the percentage of trades reported to Tostnet as opposed to executed directly on the TSE.”

Record Volume

Trading volume is at a record on Tostnet, with about 39 billion shares changing hands so far this year, according to preliminary TSE data. That compares to the previous record of 36.4 billion shares in 2009.

“It’s very difficult to estimate percentage growth because dark pool statistics are not officially published anywhere,” said Daiwa’s Mittal. Requiring dark pools to connect to Tostnet or similar systems at other exchanges “is a positive move as all trades will be published and consolidated on one venue to provide greater market transparency and efficiency.”

The growth of dark pools in Asia has lagged behind the U.S. and Europe because regulators in the region have been slow to accept the systems, Greenwich’s Feng said.

Trades through dark pools this year in the U.S. accounted for 10 percent of the total, and 5 percent in Europe, he estimates.

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