European Dark Pools Expand, Spiting Regulators' Ambitions

UK
Photographer: Simon Dawson/Bloomberg
  • Dark trading increased 45%, while public trading rose 28%
  • Caps on European dark pools may be delayed until 2018

Stock trading grew faster in European dark pools last year than it did on public exchanges, signaling that a regulatory campaign to clamp down on the practice is struggling to change behavior.

The region’s dark pools -- venues that don’t display prices before trades take place -- enjoyed a 45 percent jump in the value of trading they handled in 2015, according to broker and equity-market operator Investment Technology Group Inc. Public exchanges saw a 28 percent increase.

Dark venues are expanding more quickly than their lit counterparts, even though the European Union is planning to impose tough restrictions on them. The EU institutions are concerned that public markets will become less efficient and share prices less accurate if dark pools grab a sizable share of equity trading. At the same time, U.S. regulators have fined several dark venues, including ITG, for rule breaking.

“It’s a continuation of a trend that we’ve seen since these platforms launched,” said Rob Boardman, chief executive officer of ITG’s European arm. “The buy-side finds significant value in dark liquidity, and we expect that this demand will continue.”

ITG’s data doesn’t include bank-run pools known as broker-crossing networks, which match trades between the bank’s customers. EU regulations will eventually require banks to phase out these pools or convert them into regulated platforms.

Dark Trading

The data capture activity on European equity venues called multilateral-trading facilities, or MTFs. Dark trading on MTFs increased to 6.6 percent of the overall European stock market in 2015 from 5.7 percent in 2014, according to data from Fidessa Group Plc.

The EU will introduce a limit on the amount of off-exchange trading in any individual stock under a package of new regulations, called MiFID II. Each dark pool will only be able to handle 4 percent of overall trading in an individual security. Total dark trading will be restricted to 8 percent of volume per stock. Breaching the caps will lead to trading being suspended.

Five years ago, dark pools accounted for only 2.7 percent of European trading, according to data from Bats Chi-X Europe, which runs the biggest pan-European stock market. That number had risen to 7.5 percent as of December.

As their share of trading has increased, scrutiny over dark pools has also increased.

Bloomberg News reported in September that Credit Suisse Group AG will pay more than $80 million to settle allegations in the U.S. that it failed to adequately inform customers of how its Crossfinder dark pool operated. In August, ITG said it would pay $20.3 million after U.S. regulators found it traded against its customers without ever disclosing the conflict.

Crucially, the incoming European rules exempt trades deemed large-in-scale. The restrictions are scheduled to start at the beginning of next year, though they are widely expected to be delayed until 2018.

“It’s not surprising that there hasn’t been a decrease in dark trading,” said Anish Puaar, European market structure analyst at Rosenblatt Securities Inc. “Nobody is going to change now for a rule that’s probably not coming until 2018.”

Stock exchanges, from London Stock Exchange Group Plc to Deutsche Boerse AG, have developed orders meant to attract block trades to their markets. Bats Chi-X Europe introduced an order book in October that prioritizes size over speed.

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