European dark pool equity trading jumps 45%

Share trading on controversial off-exchange venues in Europe has risen 45 per cent in the past six months, underlining the growing popularity of so-called dark polls with the region's institutional investors.

The growing popularity of these venues, operated by companies such as UBS, Liquidnet, Turquoise and Chi-X Europe, comes as European policy makers look to clamp down on dark pools.

A quarterly study by Fidessa, a UK trading technology company, found the total value of shares traded through dark pools in Europe in the second and third quarter rose from €143bn to €207bn.

The total value of shares traded in Europe across all platforms in the same period stayed flat at around €4.8tn.

It also estimated that the average value of trade size rose from €6,639 to €9,150.

Dark pools, in which prices are only displayed after a trade has been completed, are becoming increasingly popular with investors trading in large blocks of shares who want to avoid the market moving against them, or having to trade in small amounts with computer algorithms.

The totals calculated by Fidessa represent around 3.3 per cent of the total value of European trading in that period.

Market participants estimate that the inclusion of bank-owned venues, excluded from the Fidessa survey, would take the total to roughly 8 per cent of all trading in Europe, just over half the levels of off-exchange trading in the US.

However, European policy makers and exchanges have voiced concerns that the growth of dark pools may damage market transparency and investors' ability to find the best prices for shares.

They are debating a proposal to cap daily trading on dark pools at 4 per cent of total trading in each stock in the EU. Total consolidated dark pool transactions in the EU could be capped at 8 per cent.

"Despite this growth, we're still some way away from the proposed limits, although the latest talk out of Brussels seems to be more focused on replacing these limits with a meaningful price improvement criterion instead," Steve Grob, director of group strategy at Fidessa.

He added that high-frequency trading had fallen away from the market amid quieter conditions.

"HFT as an activity has become harder to make money from. Some of that volume has gone away and institutional volume has come back," he said.

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Fund managers have argued that caps will reduce the profits they make from investing, which will hurt the funds and pensions of ordinary people.

"Dark pools have definitely been picking up. Anecdotally, institutions are a bigger part of the market now, and people outside Europe have come back into an equity play," said Rob Boardman, chief executive of agency brokerage ITG, which runs one of Europe's largest off-exchange venues. "Simply though; the word is out. Dark pools aren't dangerous."

Roughly 36 per cent of total volume on UK markets takes place on off-exchange venues, with about 14 per cent in both Germany and France, and 8.5 per cent in Switzerland.

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