Traders are increasingly embracing dark liquidity
pools as destinations to get large equities orders filled in the US and
Canada. In this second act, many dark liquidity providers are taking their
shows on the road to both Asia and the post-MiFID European marketplace.
However, it remains unclear at this stage whether widespread adoption is
going to become a reality.
Dark liquidity pools are blind-book markets that
have limited or no transparency on a pre-trade basis, and frequently on a
post-trade basis as well, with the unusual goal to limit market impact
from trading large blocks of securities due to information leakage. Dark
liquidity pools are typically sponsored by a single broker, a consortium
of brokers, or by a technology company that operates very similarly to a
broker. Additionally, exchanges in the US have begun introducing their own
dark liquidity pools in the form of continuous block crossing. Today,
broker- and exchange-sponsored dark liquidity pools account for
approximately 7–10% of US equities share volume and are growing.
In a new report, Dark Liquidity Pools in Europe,
Canada, and Japan: A US Phenomenon Goes Abroad, Celent examines the
current adoption of dark liquidity pools in the US, Canada, European
markets, and Japan and provides insight into the potential future.
Currently, dark liquidity pools account for
negligible volumes in the European equities market. Despite a flurry of
market entrants in Europe including ITG Posit, Liquidnet, and NYFIX Euro
Millennium, overall penetration is still fairly low. Over the long term,
however, dark liquidity pools will offer incremental liquidity
destinations and capabilities to the European equities market.
In Canada, alternative trading systems (ATSs) and
dark pools account for a tiny percentage of the market but have only been
active since 2006. Liquidnet currently leads the pack, although Perimeter
Financial BlockBook and TriAct Match Now (ITG) are also present. In Japan,
market penetration of dark pools is less than 0.1% of daily flow, with
only Instinet making notable strides.
This report explores the various market models and
successes of dark liquidity providers. Defining characteristics of these
providers include openness to dealers, acceptance of algorithmic flow,
share minimums, and types of matching systems. They determine the
optimization of the dark pool for a particular type of trader and order
type.
“Dark liquidity pools do not appeal to all types
of traders and cannot replace all the features of exchanges,” says David
Easthope, senior analyst in Celent's Securities & Investments
group and author of the report. “In the European markets, where it is
really quite early for dark liquidity pools, exchanges will not stand and
watch liquidity be siphoned off to these pools without a fight. However,
dark liquidity pools have found a receptive audience in the Canadian
equities markets in addition to the US. In Japan, adoption of dark pools
is thought to be years away from being widespread.”
This 34-page report contains ten figures and eight
tables. A table of contents is
available online.
