Investors warm to the dark side

Anne PlestedInteresting article today in efinancialnews comments that in the year to August there has been a marked increase in the overall use of dark pools compared to execution on exchange for equities.

The review of MiFID is mentioned and, yes, the ability of Organised Trading Facilities (OTFs) to use discretion and prevent HFT participation on their platforms may be key to execution quality. The upcoming regulatory changes will likely bring more transparency to broker crossing systems as they become classified as OTFs and MTFs but it is worth pointing out that the existing waiver system which allows such venues to operate in the dark will remain, although expected to be more stringently monitored.

Also, a new obligation on venues to provide data on the quality of their execution of transactions should go some way to allying concerns raised by the buy-side.

If OTFs can prevent HFT participation on their platforms will this likely result in

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3 Responses to “Investors warm to the dark side”
  1. Irene Galbani says:

    Hi Anne

    I also read the article and had a look at the data it refers to (Thomson Reuters Monthly Market Shares Report). The report combines Thomson Reuters figures concerning dark pools with those of Markit referring to broker crossing activity showing that the total market share almost doubled during the past year jumping from 3 to 6%. However, looking at the original dataset, it is clear that the increase is driven by broker crossing activity whilst dark pools share remained stable.

    The Fidessa Fragulator database distinguishes 4 different trading categories according to the current MiFID regime:

    ‘LIT’ indicates trades executed on-book (RMs or MTFs book).
    ‘Dark’ indicates trades executed on a dark pool where the orders are not visible pre-trade (crossing networks organised as MTFs).
    ‘SI’ indicates trades executed by a Systematic Internaliser (investment firms which, on a frequent and systematic basis, execute client orders against their own book). This is different from simple crossing of clients’ orders.
    ‘OTC’ indicates trades that should have been executed over the counter and reported to one of the reporting venues (a sort of residual category).

    Looking at Fidessa figures for the major European indices (as listed on the Fragmentation website), the balance of power between the different trading categories remained almost stable in the past year:

    Value/ volume: over 90% equally split between lit and OTC, around 2% for SI and 1.6% for dark pools.

    Number of trades: over 90% for lit, around 5% for OTC, 1.6% for SI and around 2% for dark pools.

    Our figures are consistent with Thomson Reuters’ dark pools figure but we didn’t register any dramatic increase in non-lit trading in general.

    This is proof that we are surrounded by a variety of reports, all different and all correct as long as they stick to their respective methodologies. I totally agree that a better classification of broker crossing activity is needed but I also think that before imposing any kind of limitation to non-lit trading we should be able to understand how much of what falls under the non-lit umbrella corresponds to real liquidity. Along with many others, I’m firmly convinced that post-trade reporting standardisation is the first step we need to take.

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