The Gateway to Algorithmic and Automated Trading

Viewpoint: Miranda Mizen, TABB Group

Published in Automated Trader Magazine Issue 13 Q2 2009

“When it comes to dark liquidity, there is much at stake. TABB Group estimates that the European equity volume traded in crossing networks (MTFs) and broker dark pools will increase from 3% in 2008 to 11% in 2010 as more buy-side traders connect, liquidity seeking algorithms and matching logic is improved, and agency trading takes over the baton from risk capital. While lit venues can add dark orders and functions, these are the venues with the widest participation and therefore the least trust.”

"Trading in dark pools - whether MTFs, systematic internalisers or unclassified - offers an alternative execution method to a buy side struggling against information leakage and market impact as well as contending with a new market structure, reduced volume, post-trade visibility and an economic crisis. … The difficulties surrounding dark liquidity are exacerbated for the regulator by the mix-and-match classifications by brokers, who have interpreted the regulations in accordance with their own business model. This goes against the grain of regulatory uniformity.
"Lack of uniformity is not de facto a bad thing, and is one of the byproducts of this new regulatory environment that demands harmony and competition but which does not dictate homogeneity. However, if three broker dark pools want to link up, the fact that one is a systematic internaliser, one a MTF and the other is unclassified creates a regulatory quandary unless there is sufficient clarity that makes the disparity undisputable.

"Of equal importance, order flow executed in crossing networks and broker dark pools threatens the lit venues. Execution upstream of these venues - particularly exchanges since they still have the most to lose - dilutes the claim on price discovery, erodes their business and results in cries of foul play. Worse, this threat becomes greater when brokers link dark pools as the probability of execution increases. Yet buy-side traders are the participants most concerned about the erosion of price discovery, since they have the highest fiduciary responsibility, pay the most commissions, and have to ward off the blows of
market impact and information leakage."

Extracted from the TABB Group Perspective 'Equity Dark Pools in Europe - Is the FSA Looking in the Right Direction?' by Miranda Mizen, Principal, TABB Group