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Art of Darkness

Nice to see that SmartPool is really starting to move the dial in terms of its dark pool volume. Since January its volumes have grown to the point that it is now in third place behind Chi-Delta and the LSE’s own Turquoise. Lee Hodgkinson, CEO of SmartPool, pointed out that whilst European dark volumes are still relatively modest (around 5%) they are growing at a compound rate of 17% whilst lit equities volumes have been relatively stable over the same period. I think this is good news for the venues concerned as matching dark liquidity is significantly more profitable than matching lit flow. It’s also interesting to note how SmartPool has been able to leverage the distribution of its parent, NYSE Euronext, especially in terms of the single UTP interface that allows access to all NYSE Euronext markets (including SmartPool) through a single gateway. This makes the incremental technology cost of signing up to SmartPool relatively low and pain free.

The chart below also shows how well Turquoise has been doing in terms of growing its dark volumes:

Turquoise was quick to capitalise on market concerns in June that some high speed data feeds from other venues potentially included price sensitive information. Irrespective of whether this was true or not, Turquoise did a good job in seizing the marketing high ground by confirming the veracity of its own feed.

Another winner is Nomura NX which has set the standard for broker-owned dark pool reporting. By registering NX as an MTF, users can be absolutely sure of the true depth of liquidity they can expect and the type of participants they’ll be sharing the water with. Other banks look set to follow Nomura’s lead and register their dark pools as MTFs too but, in the meantime, we will have to make do with the combined disclosure in the BCS reports from Markit. These show the combined volume of six bank-owned dark pools at around €5 billion per month.

So, it looks like the art of growing a successful dark pool is a combination of factors: leveraging your distribution; providing real post-trade transparency; and effective marketing.

None of this helps the buy-side, however, which has to search harder and harder to find tradable chunks of dark liquidity amongst a growing number of alternatives. And, without the same level of post-trade transparency for all non-lit venues, this situation only looks set to continue.

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