Singapore Exchange's Bond-Market Foray Now Includes a Dark Pool

  • Venue is designed to minimize price impact of debt trades
  • Fixed-income platform will start in the first quarter of 2016

Singapore Exchange Ltd. will open a dark pool for bonds as the 42-year-old bourse prepares to enter the institutional fixed-income trading business for the first time next year.

The venue, which allows traders to flag interest in a security without indicating the size or the price of their desired transaction, will form part of SGX’s Bond Pro platform scheduled for the first quarter of 2016, Tsai Li Renn, the bourse’s head of fixed income trading, said in an interview on Monday. Designed to minimize the price impact of buy and sell orders, the dark pool will be the first of its kind set up by an exchange operator, according to SGX.

"We asked participants: ‘How would you like to access liquidity in this marketplace?’" Tsai said. "We found that they really wanted a dark pool."

The city-state’s exchange is pushing into the fixed-income market at a time when tougher bank regulations and an impending Federal Reserve interest-rate increase make it more difficult for investors to execute large trades. A dark pool for bonds started by Liquidnet Holdings in September is handling up to $5 billion in daily turnover and plans to double that amount by year-end.

Global Spread

Dark pools have expanded worldwide in recent years, driven by the spread of electronic trading and regulatory efforts to cut transaction costs for investors. In the U.S., more shares now change hands in dark pools than on the New York Stock Exchange. Proponents say the venues should play a greater role in bond markets as global banks pull back from their traditional roles as fixed-income market makers.

When a bond trader enters an order into SGX’s dark pool, the venue will flag to participants only the name of the company or government that issued the security. Details on size, price and whether the trader is buying or selling will be hidden.

If another trader enters an order on the opposing side at a matching price and size, the debt will change hands. In cases when two orders are close to matching, the dark pool gives the buyer and seller a chance to negotiate. None of the trades will be disclosed publicly, though the exchange may consider providing more transparency in future, Tsai said.

Currencies Covered

Initially, the new platform will deal only in bonds denominated in dollars, euros and yen, though it may expand to overseas notes issued in local currency, such as yuan-denominated bonds issued offshore. SGX already operates a bond-trading platform for individual investors.

While dark pools have become more common around the world, they’ve come under regulatory scrutiny amid concerns the secrecy surrounding trades on the venues could lead to abuses. In September, authorities in the European Union published new requirements to disclose bond trades in an effort to make markets more transparent. The U.S. Securities and Exchange Commission is considering limits to dark pool trading, while Hong Kong will implement curbs on bank-operated venues starting on Dec. 1.

Bloomberg LP, the parent of this news organization, runs an off-exchange trading system called Tradebook and owns a stake in Bids Trading LP, which operates a dark pool.

While there’s a need for new ways to match buyers and sellers in the bond market, it’s unclear at the outset whether SGX’s new platform will provide a solution, according to Ben Sy, the head of fixed income, currencies and commodities at the private banking arm of JPMorgan Chase & Co. in Hong Kong.

“It’s something interesting, because we need to search for new sources of liquidity, but this is not proven,” Sy said.

Aside from the dark pool, SGX will operate venues for trading between investors and their dealers, as well as one for market-makers. Banks acting as intermediaries in the corporate bond market will be able to transact with each other in three daily auctions, while investors seeking to trade bonds with banks can ask them for quotes through two different systems.

(Corrects Tsai Li Renn's title in the second paragraph.)
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