Deals on ‘dark pools’ set to surge

The volume of shares traded on private systems owned by investment banks, rather than on public exchanges, is set to surge, both in Europe and the US, a new report suggests.

Indeed, deals that occur on private inter-bank platforms – known as “dark pools of liquidity” – probably account for about 10 per cent of all shares trading in the US, a sharp increase from previous years, research by the Tabb consultancy suggests.

According to Tabb, “dark pools” and crossing networks captured nearly 10 per cent of the total US equity market last year, with an average of 420m shares traded per day, a number that will increase to 512m shares a day by the end of this year. In Europe, such systems accounted for 2 per cent of all equity trading and in Asia, less than 1 per cent, but both are growing steadily, according to the research.

In the US, several banks have launched their own branded internal systems, adding to the momentum. These include Morgan Stanley’s Pool, Goldman Sachs’ Sigma X, Credit Suisse’s CrossFinder and UBS’s Price Improvement Network.

There is also the Block Interest Discovery System, or Bids, an alternative liquidity source for block trading backed by Citigroup, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS.

These systems also face competition from established names such as Investment Technology Group (ITG), Liquidnet, Nyfix Millennium and Pipeline Trading.

This trend toward dark pools and crossing networks is providing a lucrative source of revenues for investment banks and it is likely to accelerate, particulaly as the introduction of the Market in Financial Instruments Directive this year in Europe is likely to expand the use of private networks there.

In response to the Mifid, seven investment banks are preparing to create a pan-European rival share execution network, known as Project Turquoise, which could challenge traditional platforms, such as the London Stock Exchange.

However, as such trading networks expand, regulatory concerns could arise because once a system accounts for a large portion of total equity market volume, most regulators require prices to be quoted to the public.

The UK financial regulator is concerned that if the market fragments, it will become more difficult to gather consistent and comprehensive data about trading behaviour on stock exchanges. “It’s clearly easier to monitor one market than several, but we will respond to the challenges as they arise,” an FSA spokesman told.
source:www.ft.com