Dark Pools Can Improve Singapore Small and Mid Cap Liquidity
The Monetary Authority of Singapore released an independent research paper detailing how dark trading could boost the appeal of Singaporean markets by improving market liquidity, especially for small and mid cap stocks.
The newly released paper by the MAS, based on predictive models and empirical data from 2016, makes the case of the benefits of dark trading despite common negative connotations to the convention due to opacity.
«For small to mid-market capitalization stocks, which tend to be more illiquid than large market capitalization stocks, our agent-based models suggest that dark trading is beneficial to such illiquid stocks even at relatively high proportions of dark trading,» the paper said, adding that it did not reflect the regulator’s view.
For such stocks, the existing lack of liquidity is often a driving force to further illiquidity as certain investors are unwilling to participate, potentially due to the effect of their trade order in the lit market where greater transparency and knowledge of such orders alone could result in significant price movements.
Not Limitless
Despite the potential benefits to Singapore's exchange, the law of diminishing returns still applies. According to the paper, once dark trading increases to 25-30 percent of total market value, lit exchange liquidity and market depth begins to worsen in a phenomenon defined as «liquidity fragmentation».
Currently, dark trading accounts for around 8 percent of Singapore’s total trading value through only two providers, LiquidNet and Credit Suisse, both of which target institution investors with larger average execution size. This figure compares to other markets like the U.S, U.K. and Australia where dark trading makes up 20 percent or more of total trading value.
SGX
The paper specifically promoted the viability of expanding dark trading activities in Singapore where the exchange’s single market data feed could lead to especially positive outcomes.
«The effects of liquidity externalities could be especially strong in market structures such as that of the SGX where dark (block) trades and lit trades on its listed securities are aggregated and disseminated in a single market data feed,» the paper said.
«From a policy perspective, these findings suggest that there is room for a more calibrated and differentiated approach towards dark trading in Singapore's equity markets than the current regime which imposes a blanket minimum threshold on all block trades.»
