Piecing together Europe’s dark liquidity

The continued growth of dark trading in Europe calls for greater differentiation among algos that seek to aggregate non-displayed liquidity for the buy-side, says William Capuzzi, president of ConvergEx’s global execution franchise.

“There has been a proliferation of dark liquidity in Europe that is tough to navigate because most non-displayed multilateral trading facilities (MTFs) and broker crossing networks (BCNs) do not interact with each other,” said Capuzzi. “This means that buy-side firms need relationships with the largest bulge-bracket brokers as well as the means to access dark MTFs, which is not an easy task.”

Unlike the vast majority of dark liquidity aggregation algos which only source liquidity from dark MTFs, agency broker and technology provider ConvergEx has agreements with 12 BCNs as well as the dark MTFs which are part of its aggregator, Global Darkest.

With BCNs accounting for 45.98% of the €53.24 billion of dark trading conducted in May, according to data provided by Thomson Reuters, this represents a valuable source of liquidity for buy-side traders. Capuzzi says Global Darkest covers over 90% of total dark liquidity in Europe, based on monthly BCN and MTF data provided by US boutique broker Rosenblatt Securities. ConvergEx operates as a direct member of each BCN it is connected to, meaning it has full visibility on where client orders are sent and does not have to rely on onward routing.

One commonly cited benefit of BCNs is the fact that buy-side traders can send orders to them in the knowledge their operators are seeking best execution on their behalf. To maintain control over how its own clients’ orders are handled, ConvergEx worked with brokers to ensure orders sent to BCNs are only executed using pre-specified order types.

“If all we are doing is simply sending orders to BCNs, we are losing control over our flow,” said Capuzzi. “We wanted to ensure that there was no onward routing by BCNs and that our orders interacted with their dark liquidity only. We have a responsibility to evaluate performance of each trade independent of the reports we receive back from our broking partners.”

This includes anti-gaming measures and how BCNs prioritise orders – if ConvergEx orders are not traded against in favour of client flow or if orders are held up before entering the pool.

The latest version of Global Darkest was launched three months ago and forms part of ConvergEx’s global execution offering. The extensive dark pool links the firm has established are also incorporated within its Grey and Abraxas strategies.

Grey is a passive strategy which uses pegged orders in both lit and dark markets, while Abraxas is an aggressive liquidity-seeking strategy Capuzzi describes as a “smart percentage of volume” strategy. Abraxas accesses all available dark liquidity while selectively grabbing liquidity offered on displayed venues.

The firm’s execution offering is connected to 55 different trading destinations globally and uses a ‘follow the sun’ approach. ConvergEx has regional desks that operate under the same business line, allowing clients to send orders in for any market at any time for execution by the appropriate desk.

“We foster close links between our sales and trading teams to ensure that clients are using the right strategies for the right trades and combine this with real-time transaction cost analysis to offer full transparency to clients,” says Capuzzi.