Dark Pools Are on the Rise in Japan

  • Value of trades in dark pools has nearly doubled since 2011
  • Country’s regulator hasn’t responded to the increase
Bloomberg’s Divya Balji reports on dark pools in Japan.

Tokyo Stock Exchange is worried about Japan going dark.

Tsuyoshi Otsuka, global head of equity market strategy for the bourse, is trying to persuade regulators to see the increasing use of private venues known as dark pools as a threat to stability. He estimates that the total value of trading in the platforms was close to 5 percent at the end of last year -- small by the standards of other developed markets, but nearly double their share in 2011.

TSE, which dominates trading in Japan, is the latest exchange operator to protest about the growing use of dark pools, seeking to kill off potential rivals by making arguments about what’s best for investors. Bourses in the U.S. and Europe have called on regulators to scrutinize the venues, though with limited success.

“It’s a reflection of how market participants have grown increasingly conscious of whether they’re getting the best deal,” Sadakazu Osaki, head of research for strategic management at Nomura Research Institute Ltd. in Tokyo, said in an interview. “You want big orders taken care of as fast as possible with minimum market impact.”

Read more: Trading in the dark -- a QuickTake on dark pools

Dark pools came about in the U.S. in the 1980s as a way for money managers to trade large blocks of stock without revealing their intentions. But while American regulators have opened up their stock market -- which now includes 12 public exchanges and dozens of dark pools -- TSE’s parent Japan Exchange Group Inc. accounts for as much as 90 percent of total domestic trading, according to Otsuka.

It’s against that backdrop that Otsuka is trying to get the Financial Services Agency to take action, so far without success even though his colleagues were part of a recent working group with FSA officials that called for rules on dark trading. He believes dark pools’ share of value in Japan could rise to 7 percent within five years, and said there aren’t sufficient regulations in place.

More Information

The regulator should at least require firms to publicly provide more information about their dark pools operations, Otsuka said. “I can’t tell if a brokerage even has a dark pool or not looking at its website,” he said.

The FSA’s stance on dark pools hasn’t changed since the working group, an official with the agency said. Concerns have been raised about transparency but the agency doesn’t see an immediate necessity to take action at this stage, he said. The FSA will reconsider should market conditions change, he added. He declined to be named due to internal policy.

An 86-page report that Ostuka published in September was an attempt to draw attention to the rise of dark pools in the world’s third-biggest stock market. But while Otsuka estimates that Japan has Asia’s largest dark pools market by trading value, it’s still some way off other developed markets.

In October, about 29 percent of total off-exchange trading in the U.S. happened in dark pools and private venues known as single-dealer platforms, according to Tabb Group LLC. About 10 percent of European equity trading takes place on dark pools, although the real figure may be higher because banks do not have to report some types of transactions. Incoming regulation known as MiFID II will lower that figure because it will limit to 8 percent the amount of trading in any individual stock that can take place on dark pools.

— With assistance by Will Hadfield, and Annie Massa

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