Published On: Wed, Sep 15th, 2010

TABB Group Self-Gratifying on Asia

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TABB Group AsiaI received a snippet in my inbox from TABB Group self praising on predicting darkpool market share in Asia.

The email said “At TABB Group, we will not take credit for being the first to say that dark pool evolution in Asia was going to be challenging, but we will go on record as saying our prior estimates are now being validated by marketplace reality…”. Well done TABB!

The snippet continued “performance and low turnover continue to plague the region as risk-averse traders look toward other asset classes to place their bets. ” I don’t think so.

With market impact costs close to 40 bps and spreads averaging around 20 bps in Japan you would think that investors would be very interested in price improvement off exchange. But the simple fact of the matter is that Asian buy-sides don’t understand what a “darkpool” is. It’s not because the stock market is going down or other asset classes are in vogue as our learned friends at TABB contend. Alternative trading venues have been legally mandated to operate in Japan for 12 years. It’s that the fundamental concepts aren’t grasped by the buy-side on the merits of these venues. Ask any broker selling alternative trading venue business in Asia. They will concur.

On the matter of darkpool volumes in Japan it is the display venues or Proprietary Trading Systems (PTS) that are capturing market share too not just dark. SBI Japannext in particular did 1% of Japan August 30 and is now the third largest execution venue in Japan behind the TSE and OSE (Tokyo Stock Exchange and Osaka Securities Exchange for those of you who don’t know). All display. Most dark volume is attributed to internalization engines from prop desk, retail and institutional flow and smart order routing is limited. You could be very well right on the market share but it’s not only dark venues I’m afraid.

He concludes with: “While it remains a tough environment to launch, history suggests the challenges faced today are mere bumps in the road.”

Mere bumps in the road? The regulations and motivations behind them are large insurmountable walls. Exchanges in Asia are symbols of national pride and modernization and these countries have an understandably protectionist view when it comes to their bourses. But also, things like rebating is illegal in Japan, unbundling is unknown, PTS licensees are required to be a member of the exchange and, only up until last month, PTS trades were allowed to be centrally cleared. ITG closed their Japan office and Instinet dropped their PTS license on CBX Asia so that they may offer dark order types. Mere bumps in the road you say and I haven’t even scratched the surface.

The snippet began with “Late last month, Deutsche Bank’s Hong Kong unit launched its first dark pool for Asia. Dubbed Automated Trading System”

I am not sure why you even mentioned DBATS (btw it’s not called Automated Trading Systems its called Deutsche Bank Automated Trading System). DB is only offering a darkpool in Hong Kong and isn’t planning to serve Japan into next year.

The email ended with a boilerplate “register for access to TabbFORUM, the online global capital markets thought leadership site…” Well judging by the disinformation I received they should change it to “the online global ex-Asia capital markets thought leadership site”

Perhaps you should leave the self-gratification in the bedroom.

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  1. carl gough says:

    I like your style, It is quite often the case Steve, those who think they “know about Asia” dont and those that think they “dont” – do.

    Wouldnt be the first time that someone from out of the region makes a call on what is happening here or what they think best for us.

    onwards and upwards

  2. Steve says:

    Too be fair dark volume in Asia is growing. I thought that since the article seemed to focus on Japan the comment was remiss in not mentioning the PTS space. Also, the reason for the lack of alternative venue growth was wrong. Its not economic its educational. Both venue types should accelerate in the coming years. And the bump in the road comment was definitely myopic. Asia is a tough place to broker in. Of course, the “prior estimates being validated” needed to be checked too.

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