Learning From SGX’s Dark Pool Bond Market

SGX will open a dark pool for bond trading next year, as the bourse prepares to enter the institutional fixed-income trading business.

This action is in response to requests from traders.

What is a dark pool?

A dark pool is a private venue for trading securities.

The bulk of dark pool trades represent larger trades by financial institutions that take place away from public exchanges such as the New York Stock Exchange and NASDAQ. Consequently, these trades remain confidential and away from the investing public.

When a trader enters an order in the dark pool, the venue will hide most or all the information of the trader. This includes the name of the organisation, the size, the price and whether the trade is a buy or a sell.

Trading will take place when a buy and sell orders are matched, with little information disclosed to the public.

In short, there is no transparency, and investors will be notified only after the trades are executed.

How does it matter to individual investors?

Dark pool for trading bonds matters little to individual investors such as us. Most of us neither have the appetite nor, dare I say, the technical knowledge to trade bonds.

However, the principle behind operating a dark pool is worth exploring further, especially since the lack of access to prices should make investors think carefully about the value of a company.

Let’s say we want to invest in Singapore Telecommunications Limited (SGX: Z74), in an environment where we can only quote the price and volume of the company.

We do not have access to any other information, and would be notified only when our trades are executed. Would that not force us to focus more on the value of SingTel by setting buy order prices that are cheaper relative its intrinsic value?

Key takeaway

As investors, we need to understand the concept of buying low and to hold for the long term good companies such as CapitaLand Limited (SGX: C31) and Jardine Strategic Holdings Limited (SGX: J37).

What’s more, most of us can do our own valuations. Yet, many of us still fail to deliver good investment returns because we often let emotions to rule our rule heads, rather than the other way around.

If we can set a plan of action, and stick to it without paying too much prices, our performance could improve dramatically in the long term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.