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Dark Trading Can Boost Singapore Stocks’ Liquidity: Report

Dark Trading Can Boost Singapore Stocks’ Liquidity: Report

(Bloomberg) -- Dark trading, or off-exchange transactions, can boost liquidity of small to mid-cap stocks on the Singapore exchange, according to a report written by officials at the Monetary Authority of Singapore.

The research report, which the MAS said doesn’t reflect its views, uses statistical models to show dark trades should be limited to about 25% of total trades in a single stock before they start taking business away from the exchange.

“While our results generally support the conventional criticisms of dark trading, we find that on-exchange liquidity (lit market liquidity) starts to worsen only when the proportion of dark trading increases beyond certain levels,” authors of the report Chioh Wenn Sheng, Chua Bing Kiat, Andrew Ang, Fan Jia Rong and Brandon Sim wrote. Both Chioh and Chua are deputy directors at MAS, according to their LinkedIn profiles.

Singapore’s stock market has suffered from a spate of privatizations and low valuations in the past few years. Regional rival Hong Kong had a market capitalization of HK$31.8 trillion ($4.1 trillion) in October, about six times that of Singapore, according to exchange data. Liquidity in the former, meanwhile, is more than 10 times that of the Southeast Asian city-state, Bloomberg-compiled data show.

The paper’s findings might seem counter-intuitive to some, given that dark pool operators globally, particularly in the U.S., have been under scrutiny in recent years because of their role as opaque alternatives to exchanges, with no pre-trade transparency.

Dark trading accounts for about 8% of total traded value in Singapore, a fraction of markets such as the U.S., U.K. and Australia where they account for 20% to 28% of all trades, according to the report.

According to the paper, part of the reason for low dark trading levels in Singapore is that it restricts every transaction to a minimum of 50,000 shares or S$150,000 in value, unlike other markets. The average trade size on Liquidnet Asia Ltd., one of Singapore’s two dark pool operators, is $1.3 million, according to its Asia-Pacific Head Lee Porter. Australia has a tiered approach based on market capitalization, whereas Hong Kong and Japan have no minimum thresholds.

Singapore should study the Australian model because it provides “a thoughtful and sensible approach” without interfering with price formation on the lit market, Porter said.

The paper provides useful model-based research on market structure, said a spokesperson for Singapore Exchange Ltd.

To contact the reporter on this story: Ishika Mookerjee in Singapore at imookerjee@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Teo Chian Wei

©2019 Bloomberg L.P.