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

href="http://www.ft.com/cms/s/0/1e62b5be-f93b-11de-80dc-00144feab49a.html"

target="_blank">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

href="http://www.asic.gov.au/asic/asic.nsf"

target="_blank">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

href="http://www.chi-tech.com/news/press%20releases/2009/Chi-X%20Global%20and%20SGX%20Partner%20Press%20Release_FINAL_12Aug09.pdf"

target="_blank">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.