A best bid offer (BBO) price made of consolidated multilateral trading facility (MTF) data will in some cases outperform that of the primary market, but using a single MTF's price data to formulate a mid-point best bid offer price would not.
That is the conclusion of best execution analysis provider LiquidMetrix, in a research report that look at how ‘fair’ different possible reference prices would be in the context of actual trades executed on three European dark pools. The analysis included the primary price of the London Stock Exchange as the current benchmark.
“We asked the question, what would the effect be of using a different reference price to primary mid?” said Darren Toulson, head of research at LiquidMetrix.
To check this the firm took all dark pool trades on Chi-Delta, BATS Dark and Turquoise Dark and compared the prices they actually executed at versus alternative prices that would have been found based on the mid-price of any single MTF venue or the mid-price of a consolidation of the three largest MTFs.
“We found that for the most liquid 100 or so UK stocks the Chi-X Europe mid-price was more or less ‘as good as’ the primary mid-price in terms of providing a reference price that would fall inside full market European BBO,” said Toulson. “After that there was a pretty sharp drop off for the less liquid stocks. With a consolidated Chi-X Europe, BATS Europe and Turquoise MTF mid-price, we found that for the most liquid stocks this consolidated mid was actually better than the primary mid – but again outside the top 100 stocks the performance of the MTF mid-prices dropped off pretty quickly.”
Chi-X Europe, which is being acquired by BATS Global Markets, the parent of BATS Europe, has had discussions with regulators about the use of its own data to provide a mid-point price for its dark pool. The option is looking more attractive for dark trading venues following recent increases in fees by the London Stock Exchange and Nasdaq OMX Nordic for use of their data for non-displayed purposes.