Niche plays, innovation thrive in dark MTF tussle
Dark pool operators must inspire long-term loyalty
through differentiated service, or risk being eclipsed by new, innovative platforms,
recent shifts in the market share of Europe’s dark multilateral trading
facilities (MTFs) suggest.
From Q1 2011 to Q1 2012, established dark
venues including Liquidnet, NYSE Euronext’s SmartPool and Nomura’s NX dark pool
have lost market share, while newer platforms such as UBS MTF and Goldman
Sachs’ SIGMA X MTF have seen significant growth.
In March 2012, Chi-X
Europe's Chi-Delta increased its market share from 23% to 25%, while agency
broker ITG's POSIT dark pool ticked up from 13% to 14%. UBS MTF kept its
market share steady at 14.5%, but Goldman Sachs' SIGMA X MTF rose slightly from
11.45% to 11.74%. The biggest monthly losers were BATS Europe, which fell
two percentage points month-on-month to end March on 9%, and Turquoise, which
slipped from 9% to 7%. Over the same period, SmartPool decreased from 2.51% to
1.85%, Nomura NX 4.93% to 4.65%, while Liquidnet fell from 5.85% to 5.59%, but
all three have experienced larger reductions over the last 12 months.
Part of the
explanation for swings in market share could be the continuous introduction of functionality
on newer platforms that broadens the price points at which trades can be
SmartPool saw its market share slide from 8.4% in March 2011 to just
1.85% in March 2012. Meanwhile, Nomura NX fell from 8.1% a year ago to 4.65%
market share in March this year.
“The ability to trade at the bid and the
offer, rather than just at the mid point, has been quite a dramatic change,”
said Andrew Bowley, head of electronic trading product management at Nomura.
“Without a doubt some of the venues that have jumped up the league tables have
had a very high proportion of bid and offer trading, and that’s a significant
part of the trend occurring in the marketplace.”
Both UBS MTF and SIGMA X MTF offer trading
at the bid and offer. Both platforms have also attracted high-frequency market
markers to increase flow. Nomura is in the process of rolling out its own bid
and ask order books for NX. Bowley said the new price points have increased
trading volumes on rival platforms that offer the functionality at a rate of about
5% a week.
“It’s really important to keep the
distinction between bid and ask trading and our mid-point book,” he said. “We
haven’t changed the mid book – we’ve simply introduced something new and
separate. Nomura’s high-speed bid and offer matching books are designed for
market making flow, while the mid-point matching engine runs periodic auctions
with anti-gaming controls and remains for block trading. It’s all about
Nomura also operates VWAP crossing – giving
users a total of four possible ways of interacting with dark liquidity.
Size or speed?
Europe’s dark MTFs achieved their highest recorded volumes
in March, reaching €30.46 billion in March, versus €28 billion in February and
€24 billion a year ago. However, total European dark trading – including broker
crossing networks (BCNs) – actually fell slightly as a proportion of Europe’s
total order book, from February's record of 7.65% to 7.24%. BCNs traded a total
of €30.63 billion last month, according to figures from Markit as reported
to Thomson Reuters. Total trading across lit and dark European equity trading
venues reached €787 billion in March, up from €740 billion in February.
Advances in functionality
are not the only deciding factor in changes in trading preferences between
venues. According to John Barker, head of international, and Per Loven, head of
international corporate strategy at Liquidnet, the rise and fall of block-focused
dark pools’ market share over the last year reflects market volatility, the
rise of high-frequency trading (HFT) activity, and the withdrawal of the
institutional investors during the second half of last year and the beginning
Liquidnet saw its trading volumes fall from
€2.46 billion in January 2011 to
€1.61 billion 12 months later. The buy-side focused block crossing network
traded €1.64 billion in March 2012.
"In the second half of last year, we
increasingly saw a decrease in execution size, institutions spreading trades
out over a longer period, due to the volatility and uncertainty in the market,” said Loven. “However, this year
we are seeing a decrease in volatility and the return of block trading."
Loven estimates that
HFT as a percentage of European trading has increased from 35% to 45% over the
last 12 months, while institutional non-HFT flow – Liquidnet’s core market – has
decreased by around 30% over the same period. “Compared to market
context, we’re actually tracking our best ever quarter,” he said. Liquidnet estimates that of some €2.7 trillion
traded in European equities in Q1 2011, around €1 trillion represented HFT
activity – leaving around €1.7 trillion institutional and retail flow. By
contrast in Q1 2012, only €2.2 trillion was traded, of which around €1.1
trillion consisted of HFT flow.
“That’s a 33% fall in
the area of the market we can pursue, and that squares exactly with our Q1 results
year-on-year,” said Barker. “We are tracking what is available to us, so we are
confident that we are following the institutional market volumes.”
participants suggest that the rise and fall of different platforms may be
influenced by cyclical factors and potential regulatory changes under MiFID II.
Since dark MTFs are non-discretionary, they cannot prohibit access. This can
lead to a natural progression of high-quality market participants from one
venue to the next, according to Mark Goodman, head of quantitative electronic
services at Société Générale Corporate and Investment Banking.
"The fact that dark MTFs are non-discretionary may help explain the
pattern that we often see in dark pools, whereby they start, pick up flow,
expand as they become more popular and then drift back to lower market share
again,” he said. “As they become
more popular, the quality of participants goes down – but there’s no way for
these venues to choose the participants. As clients see toxicity rise they
reduce their flow to that pool and begin to use others, and so the cycle
The inability of MTF
operators to select flow may be exacerbated by the possible impending demise of BCNs, which do allow operators more flexibility
on access and matching logic. Goodman points out that the proposed MiFID II
requirement for BCN operators to run either an MTF or a systematic internaliser
may well result in venue consolidation.
"I expect we’ll
see fewer dark trading venues in future, because some of the independents don’t
have enough flow to survive,” he said. “Venues need to differentiate themselves
– it’s in nobody’s interests to have multiple venues that are essentially the
same as each other."
According to Liquidnet’s Barker, market trends
support further growth in block trading again after a period in which selling
has outstripped buying interest by a significant margin.
"Across all of 2011, we saw predominantly
net selling over buying – at its worst point, up to 70% selling, 30% buying,”
said Barker. “But during Q1 this year, we have seen a shift to net buying over
selling, from a sentiment standpoint this is really important. We are
seeing good signs that institutions have more liquidity, they are starting to
be net buyers, and as the volatility in the market comes back to more stable
levels, they will trade more."