Block-Hunting Algorithm May Portend European Dark Pools’ Future

European policy makers want to make dark pools revert to their original purpose as places for trading blocks of stocks, rather than venues that break orders into tiny slivers. Algorithms may help turn that goal into reality.

With those regulations in mind, Investment Technology Group Inc. has revamped its program for finding the best prices for large trades, it said in a statement Tuesday. The broker, which also operates its own venue, probably won’t be the last firm to roll out block-friendly features.

The market is changing to adapt to European Union regulations regulations that take force in 2017, which will cap dark pool trading except for larger orders, known as large in scale. While policy makers want to make stock trading more transparent, their regulations attempt to protect bigger transactions, which are more vulnerable to being exploited by other traders.

“You are going to see all the serious algo players adapt their algos and order-reaching strategies over the next year to support and embrace large-in-scale trading,” said Rob Boardman, chief executive officer of ITG’s European arm.

ITG’s upgraded algorithm -- Posit 3.0 Marketplace -- started on Monday. It takes prices from multilateral-trading facilities, such as London Stock Exchange Group Plc’s Turquoise, and bank-run venues including broker crossing networks.

Turquoise, Plato

Turquoise has already responded to MiFID II by creating a conditional order type called Block Discovery. The algorithm lets users offer to buy or sell a large block of shares while simultaneously lining up smaller trades should a big single transaction not be available.

To use such order types, ITG customers will have to opt in to the service.

“This will be our first algorithm that uses or can use those order types,” Boardman said. “We recognize that there will be other external venues like Turquoise BDS that will also offer these kinds of mechanisms because everyone is trying to cross a block.”

A consortium called Plato Partnership Ltd. is developing its own venue to attract the largest trades.

Dark pools got their name because they don’t publish their price quotes. This secrecy helps investors trade large orders without tipping the rest of the market to their plan, but it also makes it harder to tell what bids and offers are available. ITG uses machine learning, including trial-and-error analysis and historical price data, to overcome that obstacle.

The 28 nations in the EU don’t have a central price tape for equities, unlike the U.S., so ITG will take its prices directly from venues such as Bats Global Markets Inc.

The software builds databases of information about different marketplaces, sniffing out the stocks that trade on them, their execution quality and the availability of liquidity at different times of the day in different sectors.

“You have to glue in the spaghetti of different feeds you get from different venues,” Boardman said.

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