Off-book trading in negotiated trades took over from the auctions as the second largest liquidity pool in 2022, according to data and analytics provider, big xyt’s European Equities Market Microstructure Survey.
The report, authored by Richard Hills, found that off book trading accounted for nearly 3.5% market share away from the order book, reaching 20.8% overall, while growing by €3 billion per day – roughly the size of Spanish large cap volumes.
Overall, negotiated trades absorbed 1.54% of lit continuous trading followed by 1.2% of auction trading and 0.44% of dark trading.
However, the report noted that this does not mean that auctions have reversed their multi-year growth trend, Together with the lit continuous category, they traded over €2 billion a day more than in 2021.
By contrast, the dark pools saw a drop of market share to 6.95%, despite the loosening of the double volume caps (DVC) rules in the UK.
Systematic internationalisation (SI) also fell – by almost 5% – from a 16.7% market share in 2020 to 12% 2021. The category held steady at 11.83% in 2022. Larger trades were the most impacted while smaller SI trades fared better.
“This trend towards negotiated trades at the expense of SI is a little surprising,” said the report. It attributed the change to a range of factors including reduction in risk appetite or more activity among active managers in the block market.
The survey also compared distribution of liquidity in the order books between the European Union and UK regulatory regimes.
It noted that when the UK effectively ended the regime in 2020, dark trading jumped from 13.8% to 15.6% of the order book, and from 9.3% to 10.7% of overall trading, before settling back to previous levels in 2022.
It pointed to the mid cap market as the main driver with the FTSE 250 steadily climbing from 15.7% to 17.5% of order book trading in dark pools over the year.
The survey showed that volumes in the UK mid-caps fell almost 10% in 2022, while the large cap volume increased by a third.
“It is tempting to suggest that the trailed increase in the EU’s 8% limit may be more likely to affect mid cap names and have limited impact on the bigger names,” it said.
