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AseanAffairs Magazine November - December 2010

China in Spotlight
The emerging role of China in the 21st century is a focal point for conjecture and a certain degree of apprehension in the world outside of China. Is China an ally, a competitor, an adversary or perhaps all three?

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he flood of money into emerging economies over the last year has been led by a relatively new phenomenon, Dark Pools.

Dark pools are financial trading venues or clearing networks that operate in a similar manner to exchanges but provide local liquidity instantly that is not displayed on brokers’ order books. This is useful for traders who wish to move large numbers of shares or money without revealing themselves to the open market or going through the process of wiring funds.

Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges’ public limit order books but without showing their actions to others. Dark liquidity pools avoid this risk because neither the price nor the identity of the trading company is displayed.

Dark pools are recorded; however, they are recorded as over the counter transactions. By doing so, the more detailed information about the volumes and types of transactions is left to the

clearing network to report to clients if they desire and are contractually obligated.

In most cases there is no need to report such activity to regulators.

Dark pools allow funds to line up and move large blocks of equities without red tape or disclosure. Modern trading platforms and the lack of human interaction have reduced the time scale on market movements. This increased responsiveness of the price of an equity to market pressures has made it more difficult to move large blocks of stock without affecting the price.


Dark pools have become so valuable in the large scale trading of equities in the last few years that these dark pool operators are launching other products such as foreign exchange, fixed

Who is Who in the Dark Pool Business

• Barclays Capital - Liquidity Cross (LX)
• BNP Paribas
• BNY ConvergEx Group (an affiliate of Bank of New York Mellon)
• Citi - Citi Match
• Credit Suisse - CrossFinder
• Fidelity Capital Markets
• Goldman Sachs Execution and Clearing • Knight Capital Group - Knight Link, Knight Match
• Deutsche Bank Global Markets • Merrill Lynch
• Morgan Stanley
• Nomura - Nomura NX
• UBS Investment Bank
• Ballista ATS Ballista Securities LLC
• BlocSec
• Bloomberg Tradebook (an affiliate of Bloomberg L.P.)
• Instinet
• SmartPool
• Posit/MatchNow from Investment Technology Group (ITG)
• Liquidnet
• NYFIX Millennium
• Pulse Trading BlockCross
• RiverCross
• Pipeline Trading Systems
• BIDS Trading - BIDS ATS
• LeveL ATS
• International Securities Exchange
• NYSE Euronext
• BATS Trading
• Direct Edge
• Swiss Block
• Chi-X
• Turquoise

Dark Pool Aggregators

• Progress Apama
• ONEPIPE - Weeden & Co. & Pragma Financial
• Xasax Corporation
• Crossfire - Credit Agricole Cheuvreux

interest, commodities, and anything else that can be bought and sold with the help of industrialsized, algorithmic-based, electronic trading systems.

This month in Asean, Chi-X Global and the Singapore Exchange (SGX) joint venture Chi-East received the approval of the Monetary Authority of Singapore to operate a dark pool trading platform. Chi-X will become the driving force behind equity value growth not only in Singapore but in all of Asean.

Chi-East has very strong interest from major investment banks and local brokers for the platform and access to Asean markets.

So how will dark pools impact Asean markets in the next 5 years? With the volume will come volatility. As the Asean markets currently trade at valuations far lower than those of New York and London, they are well short of the regional leader China. Asean markets should, given the new liquidity, begin to move toward even higher levels, moving from a range of 12-14 P/E to 20-22 P/E. Dark pools and hot money have the very real potential to almost double the index values of the Asean exchanges, but before rushing off to invest in just anything, remember the volatility.

In selecting what to buy in these markets, close attention must be paid for performance. Dark pools are fast and fickle, they can certainly lift the valuations of companies but at the same time they will punish nonperformers, and of course there is the foreign exchange component of the investment.

Should you invest US$1million in, say, a Thailand equity in Thai baht and see a 30 percent return over 2 years, that means 30,000,000 Baht invested and withdrawn in 2 years after earning 30% is 39,000,000. The value, or real return, will be a function of the exchange rate back to US dollars at the time. If recent estimates of 25-27 baht to the dollar are correct over a 2-year period, the 39,000,000 becomes US$1.44m-US$1.56m.

No wonder there is so much hot money! Worsening deficits and continued bailouts raise serious questions about the value of the US dollar over the next 5 years, and this is the real trigger for institutional investors to look to dark pools and emerging markets to provide a hedge against a falling USD and to profit from the drift lower.

The US dollar is the driving force of the hot money surge.

So, what is best to buy in Asean?

Continued from page 28... funds in Hong Kong, Macao and Taiwan. In addition, his investigations also detected that funds from overseas Chinese and a small number of overseas investment funds had also begun to enter the mainland. But he went on to say that there was no indication that international hedge funds were diverting hot money into China.

Li also uncovered several channels by which overseas hot money entered the mainland. These included companies exaggerating the price they paid or received for traded goods, individuals or companies falsifying capital contributions to foreign-funded companies, foreignfunded companies releasing falsified profit performance reports or of individuals transferring funds via foreign-funded institutions.

A source from a real estate company in Guangzhou said that as long as overseas funds wanted to find a channel to enter the mainland, they could do it. Even if they could not flow through the conventional agencies, they could always turn to the underground banks.
See: Underground Banks – lifeblood of China’s private sector.
http://www. Savings/Household/Features/TheBigCall/ article/20100715/547670e6-8f2c-11dfa580- 00144f2af8e8/Underground-banks– lifeblood-of-the-private-sector



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>> Academics estimate that the total amount of Hot Money that recently found its way to mainland China was in the vicinity of more than US$300B, accounting for upwards of 15 percent of the country’s foreign exchange reserves. <<

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