Another Dark Pool Turns Out Its Lights

Terry Flanagan

Another high-profile dark pool has been forced to close down its alternative trading venue amid lower-than-expected trading activity.

Chi-East, the joint venture between the Singapore Exchange and Chi-X Global, has shut down as trading volume remains low and future prospects look dim.

“Although trading volumes were improving, they were still far short of expectations,” said Chi-East chief executive Ned Phillips. “Due to commercial considerations and expectations of continued relatively weak business prospects, the shareholders have mutually agreed to cease operations of Chi-East.”

Jessica Morrison, head of Asia Pacific market structure at Deutsche Bank AG, said: “For those in support of competition in the Hong Kong and Singapore stock markets, it is clearly an unfortunate development that the only non-broker trading alternative is closing. The low numbers of members, combined with the costs associated with running such a platform, meant it could not get the liquidity needed to be a lasting contender.”

Dark pools such as Chi-East operate as alternative trading systems where orders can be matched anonymously and without price impact.

“It demonstrates that it’s challenging to have a viable pan-Asian venue given the complexities of the reporting and clearing requirements of the stocks in each country of origin,” added Morrison.

The closure comes as the region slowly begins to accept dark liquidity. Dark trading on proprietary trading systems in Japan reached about 8% as of late 2011. Dark trading accounts for about 11% of equities volume in the U.S. and 5% in Canada.

However, Chi-East is perhaps the latest victim in what has been an extended period of declining trading volume. Equities trading volume in total in the U.S. was down 16% year-over-year during the first quarter of this year, part of a longer trend of volume declines dating back several years now.

“The launch of Chi-East directly corresponded with a period of slower market volumes globally,” the Singapore Exchange said in a statement. “Although trading volumes were improving, they were still far short of expectations.”

The move comes as a disappointment for Chi-X Global, which has seen success in other markets. Chi-X Canada currently trades some 12% of Canadian equities, Chi-X Japan controls about 3% in Japanese equities, while Chi-X Australia has been off to a solid start as well since launching late last year, garnering 3% market share.

In addition, although it no longer has any affiliation with Chi-X Europe, the lit venue which it founded in 2007 has grown to be the largest pan-European trading venue in Europe. Kansas City-based Bats Global Markets in December acquired 100% of Chi-X Europe. The combined entity, Bats Chi-X Europe, has about a 25% market share in European equities trading.

Meanwhile, Goldman Sachs’ Sigma X Canada closed in late April amid disappointing trading volumes. Founded seven months ago, the venue never really got off the ground, accounting for just 0.004% of Canadian equities trading. The withdrawal came as a new slate of regulations aimed at culling dark liquidity in Canada were approved.

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