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Barclays Planning Tokyo Dark Pool, Daiwa Sees Expansion in Asia

Barclays Plc plans to open its first Asian dark pool in Tokyo, and Daiwa Securities Capital Markets Co. is looking to expand into Hong Kong and Singapore, as popularity of the off-exchange trading platforms increases.

The Barclays venue will target international clients trading in Japan and expand to domestic users, according to Michael Kim, head of equities electronic trading in the Asia-Pacific region at Barclays Capital Inc. in Hong Kong. Barclays is seeking regulatory approval for the dark pool and doesn’t know when it will open, Kim said.

“In Japan, while dark pools are a real factor, they are still in the early stage of growth,” Kim said in a telephone interview on Sept. 28. “We’re going to employ a lot of the logic that is currently used in our U.S. dark pool, but we have to localize it to meet the various differences around market behavior, liquidity and regulation that exist in Japan.”

Dark pools are private venues for trading securities that don’t publicly display bids and offers. The platforms, designed for mutual funds and other large investors who would rather not use public exchanges where traders may sniff out and exploit their intentions, are expanding in Japan after growing in popularity in the U.S.

No more than 2 percent of trading in Asia occurs through dark pools, according to Investment Technology Group Inc., a New York-based brokerage. That compares with 12.1 percent of U.S. trading in June and 2.7 percent in Europe, according to data from New York-based brokerage Rosenblatt Securities Inc.

Reporting Rules

Rules that require trades done outside exchanges to be reported to a system called Tostnet, operated by the Tokyo Stock Exchange, have boosted interest in dark pools among institutions, Joseph Sarcona, head of electronic trading for Asia-Pacific at Morgan Stanley in Hong Kong, said in a telephone interview on Sept. 28.

Having the extra layer of transparency and accountability has made local institutions more comfortable with the concept. When dark pools were first launched in Japan about five years ago, the trades didn’t have to be reported.

Bank of America Corp., BNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Daiwa, Goldman Sachs Group Inc., Instinet Group Inc., Liquidnet Holdings Inc., Morgan Stanley, Nomura Holdings Inc., and UBS AG operate dark pools in Japan.

Investment Technology Group Inc.’s platform, POSIT Marketplace, which allows clients to access multiple dark pools through one point, was launched in Japan last month.

Hong Kong, Singapore

Chi-East, a joint venture of Chi-X Global Inc. and Singapore Exchange Ltd., matches Japanese, Hong Kong and Singapore stocks. The system allows clients to access dark-pool trading in Japan even if they are not located there.

In Hong Kong, Bank of America Merrill Lynch, Citigroup, Credit Suisse, Deutsche Bank AG, Goldman Sachs, Instinet, Liquidnet, Morgan Stanley, Nomura and ITG’s POSIT have dark pools.

In Australia, they are operated by Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank, Goldman Sachs, Liquidnet, Morgan Stanley and ITG’s POSIT. Singapore’s dark-pool operators include Citigroup, Credit Suisse, Liquidnet and Goldman Sachs.

Daiwa, a Tokyo-based broker, has operated the Daiwa Routing & Execution Crossing Technology, or DRECT, dark pool in Japan since last November.

David DeGraw, a director in electronic trading services for Daiwa in Tokyo, said in a telephone interview on Sept. 27 that the company plans to expand this technology into Hong Kong and Singapore from next year.

‘Tremendous Interest’

“Since the launch of DRECT, we have seen tremendous interest from the domestic client base to use our dark pool,” Degraw said. “We are roughly halfway through on-boarding the large domestic client base with the rest targeting year-end to come on board.”

Singapore has lagged behind Japan, Hong Kong and Australia when it comes to the growth of dark pools because of regulations in the country.

“There is a minimum cross size of 50,000 shares or S$150,000 ($116,000), which restricts the amount of orders eligible for crossing,” Morgan Stanley’s Sarcona said. “We are optimistic that the exchange and regulator will in due time review the benefits crossing brings to price and liquidity improvement for end-investors, and adjust this requirement accordingly.”

Morgan Stanley has had dark pools in Japan since 2007, Hong Kong since 2008 and Australia since 2010. Sarcona said the introduction of more dark pools to the market will increase the volume of orders crossed, the liquidity and the benefits of the venue to the end user.

“Increasing the efficient use of dark pools will help the trading community deal with the two most important factors in trading Asia, which is spread and liquidity,” he said.

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