Recent criticism of dark trading has sparked an important debate about the future of European equity markets. However, much of that debate rests on broad generalisations that risk obscuring rather than illuminating the real issues.
The first challenge is definition. Dark trading is often used as a catch-all term covering everything from dark MTFs to systematic internalisers, bilateral trading and other off-book activity. These are not the same. They operate differently, serve different purposes and are subject to different regulatory treatment.
To hold a meaningful debate on the role of dark trading in European market structure, it is first important to define what we are actually talking about. Dark trading most commonly refers to trading on regulated dark venues where orders are not displayed prior to execution. The purpose is straightforward: to allow investors, particularly institutions, to execute large or sensitive orders without unnecessarily moving the market or revealing their intentions. For institutional investors managing pensions, insurance and long-term savings assets, this can help reduce market impact and improve execution outcomes.
Much of the current debate has overlooked this distinction, leading to broad conclusions about dark trading that are not supported by underlying market structure. Understanding this nuance is essential, not only to assess the role of dark trading, but also to determine how Europe can build more competitive, efficient and attractive capital markets.
Execution choice
A number of key arguments against dark trading are fundamentally flawed. The first is that dark trading has eroded lit market volumes.
According to ESMA, dark on-exchange trading remains a relatively small proportion of overall market share in European equities – around 4-5% of total volume and has remained broadly stable as a proportion of overall market activity. As European equities have enjoyed steady growth beyond cyclical volatility, lit and dark on-exchange volumes have increased.
European market structure has evolved significantly over the past decade. Periodic auctions have grown rapidly, while ETF flows, systematic internalisers and new execution technologies have all gained prominence as investors seek different ways to achieve specific trading outcomes. To attribute European market fragmentation primarily to dark pools is to overlook the broader forces reshaping modern markets.
A second key misconception is that dark trading undermines price formation.
The reality is that lit and dark markets are interdependent. Lit markets remain the foundation of price formation and transparent market activity. Dark pools depend on those prices, while arbitrage across venues helps ensure fair value for an asset. This relationship is complementary, not adversarial. Lit markets support price discovery; dark markets give investors greater execution choice using those prices.
This symbiosis is reflected in the direction of European regulation. Recent reforms have focused on improving transparency and introducing a consolidated tape that will provide a more comprehensive view of activity across trading venues. The objective is to improve understanding of market liquidity, not eliminate execution choice.
Refocussing the debate
The debate around the future of European market structure should not be whether lit markets are ‘good’ and dark pools are ‘bad’. Europe needs strong exchanges. It also needs effective mechanisms that allow investors to execute large and sensitive orders efficiently.
By reducing market impact for sensitive trades and saving trading costs, dark pools provide measurable execution benefits. Liquidnet data shows that, in EMEA last year, trading on our dark venue saved investors 38.4 basis points, equivalent to $1.29 billion of market impact, relative to trading on lit markets.
As with all markets, choice is essential. If venues do not meet legitimate market need, they will diminish over time. Exchanges continue to play a vital role in European market structure, but so do venues operating alternative trading mechanisms. Without choice, European capital markets become less liquid, more expensive and ultimately less attractive to global investors.
The current debate around the role of dark trading is reductive and misses the bigger picture. Instead, we should focus on how European capital markets can become more liquid, more competitive and more attractive to global investors. That means encouraging competition, preserving execution choice, and ensuring participants can access the liquidity they need.