Tier 1 buy-side equity traders are realising the importance of algos for dark liquidity access, finds new report

Coalition Greenwich finds that algorithms’ access to dark liquidity saw the largest increase in demand from Tier 1 European equity traders from 2021 to 2022.

Around 60% of European buy-side equity traders at Tier 1 institutions listed access to dark pool liquidity as a key selection criteria for algorithmic trading, a Coalition Greenwich report has found.

While only the second in terms of priority for traders following ease of use and reliability, access to dark pool liquidity saw the greatest leap in demand across all of Coalition’s respondent segments over a 12-month period. Tier 1 institutions – reflecting 13 major firms surveyed – saw the greatest increase from 47% of respondents in 2021 to 62% in 2022.

When looking at the total number of respondents to the study, some 97 institutions, the jump in demand for dark pool access was less pronounced across a 12 month-period only increasing by 3% to 63% in 2022 suggesting institutions outside of Tier 1 have been quicker to cotton on to the need for dark pool access when selecting their algorithms.

“While US dark pool prowess is generally focused on a broker’s ability to source unique liquidity (that which tends to reside in one pool over others), in Europe overall access to the various dark pools is still a strong differentiator,” said Coalition Greenwich in its report.

The European equities space has become increasingly bloody in recent years thanks to declining commissions, increased fees and the need for expensive market data. This fiercely competitive environment has encouraged brokers to launch new offerings in a bid to differentiate themselves as evidenced by the breadth of algorithms now available to the buy-side in the market.

Coalition Greenwich’s survey found the algorithmic trading space to be intensely concentrated, with 116 Europe-based buy-side equity traders allocating upwards of a third of their electronic trading commissions to their lead brokers and two-thirds overall to their top three.

“With managers concentrating their wallet share with their best brokers, it’s more vital than ever for the sell-side to align their algo platform offerings with what their clients and prospects want and (more importantly) will actually pay for,” said Coalition Greenwich.