Liquidnet courts Asia-Pacific regulators

Following recent steps by Australia and Singapore towards allowing electronic trading platforms, a bigger choice of trading venues looks inevitable in the Asia-Pacific region -- although it won't happen overnight.

A decision by Australia to allow e-trading venues to set up alongside exchanges should encourage competition in the rest of the Asia-Pacific region, says Seth Merrin, London-based chief executive of trading platform provider Liquidnet.

Australia is reviewing three applications for market licences, including one from Liquidnet. The government says a decision on the licences will be announced in the third quarter of 2010. A favourable decision would make it the first country in the region to permit new entrants to compete directly with a local exchange and would provide more opportunities for investors, start-up companies and so on, says Merrin.

Australia has said it wants to be a financial hub for the region and has set out its stall, he told AsianInvestor during a visit to Asia last week.

The country is the first to propose such a framework in this region, but Hong Kong and Singapore, for example, both have very progressive regulators that are mulling the issue. Merrin says he has spent a lot of time with regulators in London and Washington and is now doing the same in places such as Hong Kong and Singapore, with the aim of gaining acceptance for Liquidnet's platform.

Lee Porter, Asia-Pacific managing director at Liquidnet in Hong Kong, says: "When you have a monopoly [on trading and execution] in a market, you can do what you like with pricing, and that's what has happened. [As a result], you haven't seen proliferation of trading venues happen yet in this region, but it will come, and when it does, jurisdictions will need a legal framework in place."

The problem with Asia is that there is not a common regulatory framework such as that in Europe, so legislation does not move at the same pace, adds Porter, who replaced David Klinger in May after the latter's move to Macquarie Securities. Still, regional groupings are likely to happen, he says -- for example, the Asean countries are likely to combine their markets.

And while there is strong opposition in certain Asian markets to allowing competition to incumbent exchanges, there are signs that things are moving in this direction.

Asked which country will be the region's next likely mover, Merrin points to Singapore's recent tie-up with Instinet's electronic trading platform Chi-X as one indicator that the Lion City, for one, is looking seriously at alternatives.

However, Liquidnet has the advantage over many potential rivals in that regulators in Europe and the US have accepted its model, as against most dark pools that are simply "institutionalisations" of large broker-dealers, says Merrin.

Regulators in the US, for example, are not yet convinced of the benefits offered by the 40-odd dark pools in the country over what is available on the exchanges, he adds. "This is not yet an issue in Asia, but it is in the US and it will be in this region, ultimately," says Merrin. "Authorities feel that these private markets may be good for the providers but not necessarily for all their users."

A couple of factors to Liquidnet's advantage, in the regulators' eyes, may be that it does not allow high-frequency traders onto its platform, and it has -- perhaps as a consequence -- the support of institutional investors using it. Those investors have expressed that support to the relevant authorities, says Merrin, which has been helpful in influencing how regulators, such as the US Securities and Exchange Commission, look at Liquidnet's offering.

High-frequency traders, such as hedge funds and bank proprietary trading desks, push up prices for other institutional users of the system, such as pension funds and mutual funds, says Merrin.