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Daiwa Launched a Dark Pool with SmartTrade's Technology

Japan's No. 2 brokerage house built a dark pool utilizing SmartTrade's smart order routing engine and execution technology, rather than build from scratch.

Daiwa Capital Markets, the No. 2 brokerage house in Japan, said it tapped SmartTrade Technologies to launch a dark pool in Japanese equities last year, enabling buy-side clients to cross their orders against Daiwa’s other institutional and retail flows.

The new dark pool — known as Daiwa Routing & Execution Crossing Technology (DRECT) trading system — has been live and in production since February of 2011, according to today’s announcement.

“Time to market was very important,” says Punit Mittal, Global Head of Electronic Trading at Daiwa Capital Markets in Tokyo, told Wall Street & Technology in an exclusive interview earlier this week. “We didn’t want to building something that would take two years,” said Mittal.

Though Daiwa initially considered building a system inhouse, the time to market would have been longer than with a matured product from SmartTrade, commented Mittal in today’s release. Contrary to estimates that it would take three to four times longer to build internally, Daiwa was able to deploy the system in eight months from kick off to going live.

Daiwa also wanted to make sure the platform was stable. “Throughput, capacity and resilience were critical for us,” said Mittal in the interview.

As one of the top two brokers in Japan, Daiwa sees a lot of liquidity from asset managers, insurance funds, corporates and trust funds. “We could add a lot of value by providing the contra to the domestics and offshores,” said Mittal.

The goal was to improve the executions for long-only asset managers who are often waiting in the queues to execute trades, explained Mittal. Even though the Tokyo Stock Exchange rolled out Arrowhead, its new electronic trading platform, in January of 2010, paving the way for faster trading, the spreads are still wide on the top 100 names — as much as 30 to 40 basis points, said Mittal. “If you do baskets (with 300 to 400 names) the cost will go up substantially,” said Mittal. Also, he noted, with the emergence of HFT and colocation in Japan, institutional orders were waiting in the queue and the only way to get an execution was to cross the spread.

In evaluating the build vs. buy technology decision, Daiwa decided to license the matching engine and smart order routing technology from Smarttrade, a Paris-based company while developing the software specific to the nuance of Japanese equities. SmartTrade, founded in 1999, has delivered sophisticated liquidity management systems for large global banks, including Chevreaux and HSBC.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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