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SGX set to launch first pan-Asian “dark pool”

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Singapore News Alternatives, a blog which hosts news reports from foreign sources on Singapore highlighted an intriguing report out a few days back (see here for a more comprehensive analysis):

SGX to launch Asia’s first secretive “dark pool” for institutional players
Xinhua, 12 Aug 2009
SINGAPORE, Aug. 12 (Xinhua) — The first exchange-backed dark pool in Asia will be launched by the Singapore Exchange (SGX) in a joint venture.
According to local TV broadcaster Channel News Asia on Wednesday, SGX will partner Chi-X Global, a global provider of market infrastructure technologies and trading venues, in a joint venture.
A exchange-backed dark pool is a network where transactions made are concealed from the public.

What’s a dark pool? Basically they’re private and secretive trading networks which facilitate the placing of orders without influencing public quotes of share prices. These are conducted in a clandestine manner for which details of the trade are not revealed to the public, so as not to affect share prices and cut down losses due to other traders’ possible counter-moves. This blog explains how dark pools help big game investors such as state-owned funds and mega investment banks and corporations maximise their selling profits (and conversely also buying):

Dark pools are a great way for institutional investors to adjust their investment portfolio because of the anonymity provided. When institutional investors buy or sell shares, they often move markets because of their large share holdings. However, news can easily leak out and make buying or selling much more expensive for them. Just a hypothetical example, if we learnt that Temasek Holdings is going to sell its 40% stake in a company within the next 3 days, what will many investors do? Follow Temasek and sell! Since the share price of this company will likely drop into the valley, Temasek will get lesser cash for its stake as it need to keep selling over the next 3 days even though the company’s share price continues to drop. Hence, institutional investors such as Temasek prefer to buy and sell anonymously without affecting market prices.

The planned dark pool would encompass equities on the SGX, as well as those from Australia, Hong Kong and Japan. Now of course with this there would automatically be questions as to whether such a move might make Temasek Holdings and GIC Singapore, Singapore’s two sovereign wealth funds even less transparent than they already are. Although stock transactions would be made public once concluded so as not to affect share prices, a delayed announcement simply means Singaporeans won’t get to learn of their sovereign wealth funds’ moves until they’ve already executed them; a step back for transparency.

A possible upside of dark pools, if you think about it, could be its use in circumventing illegitimate profits due to high-frequency trading. On the downside it turns out that Goldman Sachs, an investment bank which has been under a lot of scrutiny and unfavourable public opinion recently, already dominates dark pool trading. Small wonder, then, that plenty of people are suspicious of Goldman Sachs activity, myself included.

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Written by defennder

August 15, 2009 at 12:56 AM

2 Responses

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  1. I didn’t think of it this way.
    “A possible upside of dark pools, if you think about it, could be its use in circumventing illegitimate profits due to high-frequency trading.”

    And I wasn’t aware of the Goldman Sachs activity. Thanks for sharing.

    Min

    August 22, 2009 at 10:41 AM

  2. Just in case you’re interested, I wrote a post earlier considering reviewing whatever Goldman Sachs has done here.

    defennder

    August 26, 2009 at 5:49 PM


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