POPULARITY OF DARK POOLS GROWS DESPITE REGULATORY THREAT.
The popularity of dark pool trading is growing unabated despite a commitment from European regulators to curb the practice and new proposals from US regulators demanding greater disclosure from dark pool operators.
In September, the total volume of stock traded in European dark pools reached a new monthly high of Euros 41.5 billion, according to Thomson Reuters Equity Market Share Reporter. The figure takes the total traded volume in the year to September 2013 to Euros 322 billion, up almost a third on the same period last year.
New research from TABB Group also confirms an increased interest in dark pool trading. In interviews with over 90 institutional investors, senior analyst Rebecca Healey, found that nearly a quarter of asset managers now trade more than 30% of their orders off-exchange and only 6% refuse to use dark pools at all compared to 15% in 2011.
“Alternative liquidity pools or dark pools matter and they’re attracting trading volume,” says Healey. She ascribes the rising popularity of dark pools to the decline of traditional methods for executing larger order flow, such as block trading. The fall in European equity volumes is also forcing investors to seek alternative sources of liquidity.
Dark pools have been far from popular, however, with regulators who argue that the lack of transparency in unlit markets is damaging and increases risk. Mifid II is expected to reduce the use of transparency waivers, for example, which enable price formation in dark pools. Meanwhile, in the US, the Financial Industry Regulatory Authority (FINRA) has recently called for greater disclosure from dark pools. If approved, the new rules would require dark pools to report weekly volumes and the number of trades for each security. Last April, Credit Suisse which operates the world’s largest dark pool, Crossfinder, announced it would stop disclosing trading volumes, raising concerns about transparency.
In the TABB research, over two-thirds of asset managers said they were worried about how proposed regulation of dark pools could negatively affect execution of order flow. “Their concerns could lead to greater consequences,” says Healey, “such as structural changes in investment strategies, such as whether to invest in small and mid-cap stocks.” There could also be implications for execution, she says adding complexity and higher trading costs to pension fund performance.
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