A study of trading venues in Europe by agency broker and trading technology provider ITG has found that trading in dark pools can be up to 71% cheaper than incumbent domestic exchanges and 43% cheaper than multilateral trading facilities (MTFs).
The study, ‘Alternative Trading Systems in Europe’, analysed order and execution data spanning 5.6 million trades across five dark pools, four displayed MTFs and five registered exchanges in the first three quarters of 2009.
According to the report, the transaction cost savings provided by dark pools throw doubt on claims from trade body the Federation of European Securities Exchanges, that use of dark pools should be restricted to large orders. “The concept of executing smaller orders without pre-trade transparency is out of line with the spirit of MiFID,” Burçak Inel, deputy secretary general, FESE, told theTRADEnews in April.
CESR, the Committee of European Securities Regulators, recently issued a call for evidence on use of dark pools in the European equities markets.
The ITG study found that cost savings were most pronounced in mid- and small-cap stocks, where the average cost of an order in dark pools was 10 basis points, compared to 21 bps for mid-caps and 35 bps for small-caps on primary venues.
The report also found that greater participation in dark venues versus lit markets resulted in higher basis-point cost savings. In particular, this trend was most evident for orders that accounted for between 25-50% average daily volume (ADV), where dark pools were found to offer over 60 bps “in added value”, compared to under 10 bps for orders between 1-5% ADV.
ITG also analysed duration of an order against opportunity costs. For orders lasting 30 minutes with executions in both lit and dark venues, the study found that investors could save more than four bps if the whole order was executed in the dark, a figure that raised to 26 bps for orders lasting 300 minutes or longer. This was found to be in line with observations in the US market.
While it cautions against an increased regulatory regime for dark pools, the paper suggests that venue-specific reporting of transactions could help institutional traders achieve best execution. In Europe currently, for example, broker dark pools are not typically identified in post-trade reports, which hinders traders’ analysis of execution performance.
As well as its agency broking, trading technology and transaction cost analysis businesses, ITG also operates a non-displayed crossing network, POSIT.