Launched in Feb 2011, Daiwa developed a dark pool, DRECT, to consolidate liquidity from its institutional and retail clients. Daiwa has one of the largest market shares in Japan and so is able to consolidate sizeable liquidity for its clients, thereby helping clients to trade anonymously, improve execution quality, reduce information leakage, and minimize market impact. Given the specificities of Japanese market structure, Daiwa wanted to build a product that could explore some of the market inefficiencies such as large tick sizes, time priority for execution and long queues on the order book.
Daiwa initially considered building a system in-house, but decided that using a vendor system would allow them a faster time-to-market. “We considered building in-house, but we knew that meant we would first have to build all the individual components, and then make sure they all worked together. The time-to-market for the product would have been longer compared to the matured product from SmartTrade.” said Punit Mittal, Daiwa’s Global Head of Electronic Trading. Mittal estimates that it would have taken 3 to 4 times as long to build internally. Mittal went on to explain, “After evaluating a number of vendor options, smartTrade looked like a perfect fit. We needed a system that was flexible, robust, and scalable. Downtime was unacceptable, so it had to be extremely resilient. Daiwa was able to embed proprietary intelligence into SmartTrade due to its flexible architecture.”
Mittal said that Daiwa selected smartTrade because the technology firm has extensive experience in deploying dark pools and smart order routing in other markets. This made Daiwa confident that smartTrade knew and could employ best practices in customizing their system for the Japanese market. Harry Gozlan, CEO of smartTrade explains, “DRECT required sophisticated matching logic while maintaining high throughput and low latency over increasing depth and breadth of the dark order book. Furthermore, full data integrity had to be ensured at each point in the process chain without sacrificing latency.”
SmartTrade was able to deploy the system very quickly. David deGraw, Daiwa’s product manager for DRECT explains “The total time to market was eight months from kickoff to going live. It was one of the fastest deployments I’ve ever seen. It takes longer for some Western firms just to migrate their existing product from other markets to Japan. smartTrade were able to draw on their experience in assisting us with external dependencies and challenges as well.”
The results so far have been impressive. “The cross ratio is increasing every month, as is the total notional value traded in the dark pool.” Crossing ratios are now upwards of 13% and growing. “Since it went live, I’ve been completely satisfied with the way it’s been running,” said Mittal.