Nomura reclassifies dark pool for commercial reasons

Nomura will become the first investment bank to register its crossing network as a multilateral trading facility (MTF) in January, which will open up the bank’s internal liquidity to the rest of the street.
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Nomura will become the first investment bank to register its crossing network as a multilateral trading facility (MTF) in January, which will open up the bank’s internal liquidity to the rest of the street.

The crossing engine, NX, will become an MTF instead of an over-the-counter (OTC) venue on 25 January. Under MiFID, the change will require NX to publish post-trade prices immediately after a trade is completed and open its platform to other market participants.

According to Adam Toms, head of the market access group, EMEA, Nomura, the decision to re-register Nomura’s crossing engine was made for commercial reasons rather than regulatory pressure.

“Having MTF status allows us to interact more cleanly with other dark pools and expand our own pool of liquidity with flow from other market participants,” Toms told “We believe our new model will have advantages over other dark MTFs, as it will be the first to be seeded by our own equity trading floor volume, instead of relying on participants submitting orders to the pool.”

Toms added that clients have been asking for more post-trade transparency on orders executed in broker dark pools.

NX will use MiFID’s reference price pre-trade transparency waiver, which requires dark pools to match at the mid-point of a reliable reference market to forgo pre-trade transparency requirements. It will also use a new strategy waiver, introduced today, which will offer trading based on VWAP trades on the relevant primary market.

“We will allow continuous crossing of VWAP-style flow across a specified time period, which will then be matched at the price of the printed VWAP price on the primary at the end of the day,” said Andrew Bowley, head of electronic trading product management, EMEA, Nomura.

Upon its launch as a MTF, NX will also offer new functionality, including a ‘well-formed market’ check. Before a trade is executed in NX, the new service will analyse any imbalance between the bid and the offer volume on the reference market, ensure that a potential cross on NX is not more than a certain percentage of the last published execution price and determine whether or not liquidity on the bid and offer of the reference market is of a sufficient value.

“The well-formed market check makes sure NX crosses trades based on reliable reference market data and acts as a form of anti-gaming,” said Toms.

While Nomura has engaged in nine months of discussion with the UK’s Financial Services Authority, Toms still considers the OTC model used by other brokers to be an integral part of the trading landscape.

“We are not trying to set a precedent for all banks to register their internal pools as MTFs,” said Toms. “Banks have been doing OTC business for years, which is now conducted electronically and still a legitimate part of the brokerage business.”

Internal crossing networks operated by investment banks have come under intense scrutiny in recent months.

In July, the Committee of European Securities Regulators (CESR), the body responsible for ensuring regulatory harmony across member states, met with the Federation of European Stock Exchanges (FESE) and a number of brokers to try and determine the impact and level of off-exchange trading in Europe.

FESE, which represents 42 European bourses, argued that brokers should register their internal crossing networks as MTFs or systematic internalisers (SIs) instead of OTC venues. By being registered as OTC venues, FESE claimed that broker networks are subject to less regulatory oversight than MTFs, SIs or registered exchanges and therefore have an unfair advantage.

In their meeting with CESR, the brokers – comprising Credit Suisse, UBS, Goldman Sachs and Morgan Stanley – countered that neither the MTF or SI classification suited the business models of their crossing services. Furthermore, the brokers argued that they already adhere to strict best execution obligations set by clients.

CESR will report the outcome of both meetings to the European Commission, which will either feed the findings into its 2010 review of MiFID or take action sooner, depending on the wishes of Michel Barnier, the new internal markets commissioner who will replace Charlie McCreevy in February 2010.