On the train this morning, I was browsing through London’s Metro newspaper to see who the latest ‘victims’ in The X Factor, Strictly, I’m a Celebrity etc, were (incidentally, it’s probably the people that actually watch these programs, but that’s another story). I was a bit shocked, therefore, to come across a double page spread examining dark pool trading. I was even more surprised to see that it was, in fact, a pretty well-balanced article with only one small factual inaccuracy (Turquoise operates both a lit and a dark market). Other dark pool stories have cropped up recently too and so it prompted me to have a look at the latest stakes in Europe.
The chart below shows the official dark pool tally and the relative shares of the total reported dark market in Europe. What’s interesting is that you can see a steady rise in dark pool trading and that probably the biggest success story is UBS MTF. The reasons for its success are pretty simple – it has the widest stock coverage, it’s cheap and, right from the beginning, it has supported interoperable clearing.
What’s more interesting, though, is what the chart doesn’t show you. Broker Crossing Networks (or BCNs) are not obliged to report in the same way and so, whilst they still match orders away from lit markets, it’s very hard to get any accurate figures for their real volumes (either here or in the US). BCNs are absolutely in the sights of European regulators, however, and will be forced, under MiFID II, to become either full MTFs or Systematic Internalisers (a classic bit of clumsy Euro-fudging). Obviously this has got the big firms thinking hard, but I wonder what this means for the smaller firms for whom crossing client trades is one of their last truly profitable activities. The new rules will make automatic crossing a much more regulated activity, but the problem comes in exactly what activities these new regulations extend to. Obviously, the matching engines of the big boys get caught up in this definition, but what about using a spreadsheet to track different incoming client orders, or if I email a colleague on the desk next to me with a potential matching opportunity?
Yet again, then, it looks like the law of unintended consequences is going to come into play. Let’s just hope that this time the smaller firms don’t get voted off before they have a chance to have their say.