Why Asia must see the light in dark trading

WITHOUT a doubt, some issues in finance such as bank balance sheets, contagion risks and dangerously indebted sovereign nations, demand urgent action from authorities. But as the economist Milton Friedman once stated: “The one responsibility of business is to engage in activities designed to increase its profits, while also staying within the rules of the game.” In other words, businesses should engage in open and free competition without deception or fraud.

It is therefore perplexing why innovations in the cash equity markets, designed to help asset managers reduce costs and increase investor returns, have seen the ire of European Union policymakers.

Take dark pools as a prime example. Private exchanges, designed to help asset managers trade equities in large quantities at a fair price, have reduced the cost of trading shares and increased choice for asset managers. Many studies demonstrate the efficiency of executing large blocks of stock without having to show the market in advance, particularly in small and mid-cap stocks. So why have European regulators limited dark trading to only 8 per cent of market turnover – and more importantly, why should Asian rule makers not follow suit?