Proposed new rules governing the operation of dark pools in Europe are too restrictive, according to market participants speaking at the TradeTech equity trading conference in London on April 22.
Buy-side speakers and venue operators called for regulators to adopt a less onerous approach that allowed individual traders to determine their level of interaction with dark pools.
In April, the Committee of European Securities Regulators proposed a range of dark pool reforms in its consultation paper on MiFID that would affect both broker-dealer dark pools and non-displayed multilateral trading facilities (MTFs). These include a revision of the waivers that allow venues to forego the publication of pre-trade quotes and the reclassification of broker dark pools as MTFs when they reach a certain size.
“The pre-trade waivers as they stand fragment liquidity further as it’s not possible to mix dark order flow with displayed trading,” said Natan Tiefenbrun, commercial director at Turquoise, which operates a mid-point dark book and TQ Lens aggregation service. “Furthermore the price reference waiver kills innovation as it effectively bans price improvement.”
Paul O’Donnell, chief operating officer at fellow MTF BATS Europe, added that brokers operating internal crossing engines have similar functionality to MTFs but are not governed by the same restrictions, such as equal access.
However, Kristian West, managing director, equity trading, J.P. Morgan Asset Management, said that having different types of systems is beneficial and that his firm finds significant price improvement nine times out of ten when trading in dark pools. “If regulation made all dark pools equal, it would be a hindrance to our trading,” he said. “It would be more useful as a trader to have individual control rather than ensuring all dark venues are created equal.”
West, who pointed out that J.P. Morgan had conducted its own analysis on liquidity flows within dark pools to assess the risks and costs of each, argued that traders should determine the minimum size of order they wanted to interact with, rather than let regulators decide. This is a feature already employed by many dark pools across Europe.
John Rigler, head of trading at Artemis Investment Management said price was his overriding priority, rather than number of orders. “I know that more often than not, my parent order is going to reside in a broker dark pool before it goes out to the public markets.”
The ongoing industry debate surrounding the impact of dark trading has been fuelled by the Federation of European Securities Exchanges, which has asserted that broker-dealer dark pools threaten price formation because they are increasingly matching small orders that could have been traded on lit venues. However, according to Turquoise’s Tiefenbrun, “There is not a shred of evidence to suggest dark pools threaten price formation.”
Jon Ross, global head of execution services at Chicago-based market maker GETCO, added that his firm is looking to launch its own crossing network in Europe and that this new venue is not intended to influence price discovery. “We just want to give clients the opportunity to execute against liquidity they would not have otherwise interacted with, with minimum information leakage.”