Banks Reduce Dark Pool Trading as Brexit Slams U.S. Markets

Updated on
  • Deutsche Bank, Bank of America take measures to reduce volume
  • Morgan Stanley’s dark pool was offline in London this morning

Brexit Aftermath: Three Years of Global Uncertainty

Britain’s vote to leave the European Union kicked off a torrent of volume in markets around the world, prompting banks to cope with the fallout by reducing trading in their dark pools.

The Brexit result sparked a global equity selloff and set off a turbulent open for the London stock market, propelling trading volume as much as 700 percent higher than normal and slowing some opening stock auctions. Morgan Stanley’s dark pool briefly went offline during London’s morning, said people familiar with the matter who asked not to be named, citing confidentiality.

In the U.S., Deutsche Bank AG temporarily shut off outside brokers and market makers in its dark pool, SuperX, according to separate people familiar with the matter. The bank’s dark pool resumed normal operation by 11:20 a.m. New York time. SuperX is the fourth-largest dark pool in the U.S. by trading volume, according to Financial Industry Regulatory Authority data.

Bank of America Corp. asked some outside trading firms to cut their messaging volume by half, said the people, who asked not to be named because the announcements were not public. Dark pools, essentially private stock markets, were created to let big investors trade shares in secret.

“The first hour was pretty horrific,” Rob Boardman, chief executive officer for Europe of Investment Technology Group Inc., an electronic broker and dark-pool operator, said in a phone interview in London. “There was almost no trading before 8:10 a.m. because prices were just bouncing around, stocks struggling to open. Now we’re actually seeing volume go through the market properly, prices are becoming a bit more real.”

Representatives for Morgan Stanley, Deutsche Bank and Bank of America declined to comment.

The shock Brexit decision sparked an outpouring of buying and selling: European markets saw 90.5 billion euros ($100.7 billion) in trading -- about double a typical day’s volume -- by 2:45 p.m. in London, according to Bats Global Markets Inc., which operates the biggest exchange in Europe. London’s stock markets automatically pause after excessive price swings, with the London Stock Exchange’s thresholds ranging from about 3 percent to 10 percent or more.

“A number of stocks were going into volatility halts at the open,” Mark Hemsley, chief executive officer of Bats’s European unit, said by phone. “We’re just seeing really high volumes. It’s a heavy day, but we’re nowhere near our peak capacity rates.”

The New York Stock Exchange today said it would widen its price collars -- the amount a price can move up or down when it reopens after a trading halt -- to 10 percent. Trading was also expected to see a volume boost from the annual re-balancing of FTSE Russell’s stock indexes. In 2015’s re-balancing exercise, U.S. equity trading jumped by more than 10 billion shares.

While extended auctions, such as took place on London Stock Exchange, are to be expected on such a volatile day, there are signs that the infrastructure has the capacity to withstand the shock of Brexit, said Philip Gough, chief executive officer of Convergex Ltd.’s London-based brokerage.

“When you look at how the Asia infrastructure held up, I didn’t hear of any issues,” said Gough. “The capacity people have put into technology is drastically different than a few years ago. So far everything has held up.”