Smarter aggregation tools will be crucial in expanding European buy-side traders’ access to sources of non-displayed liquidity as fragmentation continues to increase, according to the latest report from research firm TABB Group.
‘Trading in the dark in Europe: choice and complexity on the cusp of change’, predicts that dark trading in Europe will account for 7% of the total daily turnover of major European markets by 2010, up from 4.1% currently.
But while the tools for spotting crossing opportunities, preventing information leakage and aggregating dark liquidity are in place, many buy-side firms are still adopting and upgrading their execution capabilities, while the sell-side is busy developing the intelligence of algorithms they offer to institutional clients to help deal with the ever-increasing number of dark pools.
“As liquidity splinters, this will work against the buy-side as liquidity becomes harder to find without leaking information,” said Miranda Mizen, author of the report and principal, TABB Group. “The best is yet to come as innovation takes off in earnest and the stakes are raised to attract order flow into the dark; but only the most sophisticated will be able to show the kind of value for which the buy side is willing to pay a premium.”
The conclusion of the European Commission’s appraisal of MiFID, which will review the waivers used by those offering dark functionality to forego publishing pre-trade quotes and add more clarity on current reporting standards, will act as another driver for dark pool growth.
According to TABB, removing the ambiguity that surrounds dark trading will further legitimise the use of the dark as a viable alternative to more traditional execution methods.
“Regulation may restrict unfettered expansion of dark environments by raising the bar on competition, but it will also marginalise those with paltry liquidity,” added Mizen.