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Fragmentation Fever Goes East

Looks like 2010 is going to be a pretty interesting year in the battle for liquidity between the established exchanges and the more recently established MTFs and dark pools. It also looks like fragmentation fever is likely to spread eastward, too. This is being driven by a number of factors that include technology, regulation and commercial opportunism. The introduction this week of arrowhead by the Tokyo Stock Exchange will bring the performance of the TSE more in line with global standards and so open the door for the High Frequency community and brokers that can exploit microsecond price movements. This, in turn, will encourage the growth and use of PTSs (the Japanese equivalent of America’s ATSs or Europe’s MTFs). Currently PTSs only account for a fraction of Japanese equity order flow but the ability to arbitrage between them and the TSE may well provide the stimulus the market needs.

Meanwhile, the regulatory picture in Australia is set to change now that the Australian Securities and Investments Commission will have the ability to grant new exchange licences. This will open up its domestic market to other competitors and so allow Chi-X Australia, AXE and other alternative venues a realistic shot at gaining market share. Given that trading volumes are smaller than in Europe or the US, however, it will be interesting to see how much fragmentation the domestic Australian market can take and it would seem that any alternative venues will need to attract flow from other Asia Pacific countries in order to be truly viable.

The Singapore Exchange and Chi-X Global have joined forces to create the first exchange-backed dark pool in the Asia-Pacific region which will compete with the global dark pools already operated by the big banks. Put all these things together and they might be enough to set off a wave of fragmentation in that region. As we’ve seen in the US and Europe, once the change happens there’s no going back. Countered against this, of course, is the argument that without a single regulatory mandate for change across the whole region, the domestic incumbents should be able to fight off the newcomers one by one. This was certainly the case in Europe pre-MiFID where a number of well constructed initiatives (anyone remember Jiway, for example?) failed to wrest liquidity away from the primaries without the help of a regulatory imperative behind them. On the other hand, maybe the events of the past few years in the US and Europe have changed the trading landscape forever and so it is simply a question of time before we see a similar, fragmented, situation across the Asia Pacific region. Perhaps the biggest driver for change, however, will come from the big banks and brokers themselves. Having invested such huge sums in SOR and dark pool technology they will be keen to leverage this investment every way they can.

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