The estimated market share of all dark pools in Europe is currently around 3-4%, a figure corroborated by a recent FSA (Financial Services Authority)/CESR (The Committee of European Securities Regulators) study for the EC. Regulatory interest was heightened in this space in 2009 when FESE (Federation of European Securities Exchanges) claimed the number could have been as much as 40%, which would raise questions around the ability of the market to perform price formation in the view of the regulatory and supervisory bodies. If nothing else, this ambiguity raises the question of post-trade transparency in this market segment.
Increased sensitivity resulted in EuroMillennium having to change their matching process (prior to being absorbed by Smartpool) and Liquidnet also had to amend a part of their offering. This stifling of innovation has been criticised by broker-dealers and trading venue providers more broadly.
It is interesting to note that the broker-dealer crossing networks and the more traditional MTF/exchange provider model started in very different places. Broker-dealers crossing networks evolved as an efficient means of matching business that has gone on for many years and just became increasingly automated. Only since 2007, have brokers given clients access via a thin algorithmic layer to their resident liquidity in Europe, and started to classify all of the crossing taking place therein as occurring in their “dark pool”.
This highlights an important potential distinction in what a pool is trying to achieve, and therefore what value it can offer to participants. Pools attached to lit trading venues can offer hybrid order types and on-routing services to try and capture SOR order flow as it is routed to market. Broker-dealer pools (both internal and MTF) will seek “blockier” flow that is typically latent on an order blotter, not being executed by a working strategy.
Nomura became the first broker dealer to launch their dark pool, NX, as an open access MTF in January this year. The key reasons for this were to increase post-trade transparency for the dark pool, and open the access to all market participants to attract an increased activity. But this is not a new precedent that must be followed by all other broker dealers. Firms may be disinclined to do this to protect the value of their internal liquidity, as has been the case for the broker dealer community historically.
2010 in the dark pool space may well see additional brokers announcing MTF launches, but most focus and most value, should be gained from the advent of third party dark liquidity aggregation services that can achieve a greater breadth of access than any single broker can offer. Turquoise/LSE/Baikal and Chi-X have already announced / launched products in this space.
Conclusion
So for 2010, we’ll see MiFID II being on the agenda for most industry events and written about in print. Addressing some of the limitations and ambiguities mentioned here will certainly be part of the objective, but a significant amount of attention will also be focused on expanding the asset classes under coverage. Exchange Traded Funds (ETFs) and Option markets will be reviewed, as well as Fixed Income securities. Dark pool evolution will continue and with the regulators increasing their understanding of the space over the last year, there is significant potential for innovation to accelerate, but it will remain in the focus of the EC. Improvements in post- trade data clarity would probably provide the biggest tangible change for the buy-side, which by itself is a huge topic that needs continued focus from all participants.
Touching the Points
