Dark pools face up to harsh realities

The closure of ICAP’s BlockCross dark pool is further evidence of the tough competitive environment faced by non-displayed multilateral trading facilities in Europe with innovation the key to survival.

The closure of ICAP’s BlockCross dark pool is further evidence of the tough competitive environment faced by non-displayed multilateral trading facilities (MTFs) in Europe with innovation the key to survival.

BlockCross originally launched in October 2009 and favoured buy-side-to-buy-side crossing in a similar way to block trading venue Liquidnet, with an option to also interact with sell-side liquidity. According to Thomson Reuters, BlockCross traded €14.4 million in August, its last month of trading, grabbing just 0.06% of dark MTF market share. It reached a peak of €37.2 million in October 2011.

The launch of BlockCross preceded an ultimately ill-fated foray into cash equities for ICAP. The interdealer broker axed its integrated full-service cash equity division in March 2010, having hired over 200 people, but opted to maintain BlockCross.

“While a number of our cash equities businesses are performing well, the expansion into full-service agency cash equities in Europe and Asia has failed to match up to our expectations,” said Michael Spencer, CEO of ICAP, at the time.

The closure of BlockCross demonstrates the challenge faced by dark MTFs, with many coming to the realisation that differentiation in functionality is critical to retaining market share.

“The buy-side probably regarded BlockCross as too similar to the service offered by Liquidnet,” Mark Goodman, head of quantitative electronic services at Société Générale, told theTRADEnews.com. “By having a largely similar profile as an existing, established dark pool there is no opportunity to attract new liquidity a problem that many dark pools face.”

Changing tact 

Those that have repositioned their offerings in recent months include London Stock Exchange-owned Turquoise’s dark pool, which introduced a random periodic auction and changed its matching logic to price-size priority in June. Nasdaq OMX’s Nordic@Mid pool also switched to price-size priority in May and aimed to discourage high-frequency trading activity by limiting connectivity options. Nordic@Mid has experienced a fourfold jump in trading activity between April and August.

The need for differentiated dark pool functionality can be seen through a shift in market share among venues, with established venues beginning to lose ground. The proportion of overall trading executed by dark MTFs has remained steady, accounting for 4.1% of trading activity in August, compared to 3.9% at the beginning of the year, according to Thomson Reuters.

NYSE Euronext-owned SmartPool has seen its volume plummet over the last year, from over €2 billion in July 2011, to €1 billion in November last year, to just €242 million last month. Nomura’s NX dark pool – the first broker to convert its internal crossing network into a MTF – has also seen volumes slide.

NX was the fourth largest dark pool at the start of 2011 with 11% market share, but only accounted for 3.4% of dark MTF trading last month.

BATS Chi-X Europe’s CXE, the dark pool formerly known as Chi-Delta, which operates on a price-time priority and charges both sides of the transaction, has found itself behind UBS MTF – the largest dark MTF – for the last three months. Previously, CXE was been the biggest dark pool for all months except one since November 2010.  BATS Chi-X Europe also operates the same pricing model for BXE, the dark operated by BATS Europe before it merged with Chi-X Europe.

Goldman Sachs’ Sigma X MTF has also seen a steady rise in volume since its June 2011 launch. Sigma X MTF was the third largest dark venue last month, trading €3.5 billion, or 14.8%, of dark MTF volumes last month. Market participants have attributed the rapid rise of UBS MTF and Sigma X MTF to the ability of users to trade orders and the bid, mid and offer price points, as opposed to the mid-point trading offered by most dark MTFs.