Dark pools both in Europe and the US have lost market share in recent months due to high volatility, according to a new report by agency broker Rosenblatt Securities.
In the US, the 19 non-displayed venues tracked by Rosenblatt accounted for 13% of consolidated US equity volume in May, down from 13.61% the previous month. Of these pools, only two managed to gain market share that month: Liquidnet, and ConvergEx VortEx, which increased month-on-month volumes by 12.61% and 12.43% respectively.
At the same time, the volatility measured on the Chicago Board Options Exchange’s Volatility Index (VIX) climbed to 17.84%. Rosenblatt notes that dark pool market share has been inversely correlated with the VIX average daily since mid-2009.
Pools at bay
In Europe, dark pools also lost market share. The 18 venues in Rosenblatt’s European database executed 3.09% of consolidated pan-European value, down from 3.29% the previous month. However, since some broker crossing networks (BCNs) report neither to Rosenblatt nor market data provider Markit, Rosenblatt estimates that the true total of dark pool trading activity in Europe in May could have been as much as 4.24%-4.75% of consolidated turnover.
The 18 dark pools that report to Rosenblatt executed an average of €2.74 billion per day in May. Rosenblatt tracks three BCNs, 12 MTFs and three exchange dark pools. Rosenblatt estimates that the three BCNs that do not report to Rosenblatt (UBS PIN, Morgan Stanley’s MS Pool and J.P. Morgan’s JPM-X) handled about €510-638 million per day in May. When these results are combined, Rosenblatt estimates a grand total of €3.25-3.38 billion dark trading in Europe per day, or 3.66-3.80% of consolidated value traded.
However, according to figures provided by Thomson Reuters, dark trading made up for 6.77% of European equity trading for the entire month in May, with roughly equal activity divided between BCNs and dark multilateral trading facilities (MTFs) – a monthly total of some €24.45 billion and €28.77 billion respectively. The Thomson Reuters figures incorporate Markit’s figures for BCNs.
The exact figure for BCNs remains difficult to establish with certainty due to the lack of publicly available data. Although six BCNs report to Markit, individual figures are usually buried in the aggregate Markit BOAT systematic internaliser or OTC categories, making it impossible to cleanly identify the trades from different BCNs without private data.
Rise of the bank platforms
UBS MTF, the dark MTF owned by Swiss bank UBS, was the largest dark pool in Europe in June, accounting for almost a quarter of the region’s dark trading alone, according to data from Thomson Reuters. Already previously reported by theTRADEnews.com in April, the success of the broker-owned platforms was also highlighted in the Rosenblatt study, which noted that bank-owned dark pools accounted for 71% of dark turnover in Europe in May.
Rosenblatt also noted the success of Deutsche Bank’s Super X dark pool, which grew by 6.47% from April to May. By contrast, Chi-Delta, the dark pool operated by BATS Chi-X Europe, declined by 12.77% in May versus the previous month.
Part of the explanation for the rise in market share for broker owned platforms is the recent improvements in functionality introduced by some of the newer platforms, according Sabine Toulson, managing director, IFS at market data provider LiquidMetrix.
“Directly comparing BCN performance with performance on MTF dark pools is complicated by the fact that BCNs usually offer a richer set of execution options, as many BCNs offer execution versus European best bid and offer rather than just primary market and also execution at touch prices rather than always mid-price,” said Toulson. “Until recently most MTF dark pools only offered primary mid-point, but Instinet BlockMatch and UBS offer more options now.”
However, not all market participants agree that bank-owned dark MTFs offer the best possible execution choice. Mark Goodman, head of quantitative electronic services at Société Générale Corporate and Investment Banking, suggests that many clients value BCNs over MTFs, because unlike MTFs, BCNs have discretion over which participants are allowed access.
“Clients like dark pools with broker discretion,” he said. “As an MTF, you have to grant access to members on a non-discretionary basis. But that discretion is what gives investors confidence about the quality of the counterparties they are interacting with.”
Goodman added that although a mid-point cross in a dark pool should in theory help long-term investors to achieve a successful trade, the benefits of doing so might be outweighed, if for example that market contains high-frequency market maker flow.
While the European Parliament is currently discussing proposals to restrict the activities of BCNs, in the US, NYSE Euronext and Nasdaq OMX Group are urging US regulators to clamp down on broker dark pools. In a written presentation to the House Committee on Financial Services last month, the two exchanges argued that dark pool operators be required to provide better prices than exchanges or offer public quotes. Otherwise, they suggested, exchanges faced becoming destinations of “last resort”, since they are subject to different, more stringent rules than non-displayed markets.