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MARKETS TODAY
US dark pools grow almost a half in past three years
PUBLISHED: 20 NOV 2012 12:59:34 | UPDATED: 20 NOV 2012 15:55:27
PETER WELLS
Yesterday the Sydney Morning Herald had a story about a guy who turned his backyard
swimming pool into a pond, which he still swims in. The water’s dark, there are little fish and
leaves in there. It’s probably like swimming in a creek.
In any case, I read about this trend of converting pools to ponds a few years ago in the Financial
Times’ How To Spend It magazine.
And with that, what a segue I have created to take note of some findings about ‘dark pools’ from
the FT. And we’re talking about equities trading here, not swimming.
Citing a survey by the London-based CFA Institute, Philip Stafford reports trading of US equities
on dark pools has grown by 48 per cent in the past three years, and accounts for 31 per cent of
total market volume as of March.
– Rhodri Preece, director of capital markets policy at the CFA and author of the report, estimated
that there was a similar proportion in Europe. “The results suggest that dark trading does not
harm market quality at its current levels but the gains are not indefinite,” he said. “If the majority
of order flow is filled away from pre-trade transparent markets, investors could withdraw quotes
because of the reduced likelihood of those orders being filled.It would be prudent for authorities
to monitor these developments closely,” he said.
– The study calculated that about 18 per cent of total volumes of trades were executed on
broker-dealers’ own trading desks – a process known in the industry as “internalisation”. That
figure included virtually all retail orders, Mr Preece said.
Other block-trading venues, whether independent or bank-owned, accounted for 8-13 per cent of
consolidated volume, the CFA said.
Dark pools allow investors to trade large blocks of shares anonymously, with prices revealed only
after trades are done. Sophisticated investors, in particular, have shifted toward dark pools from
‘lit’ markets (public exchanges) where there is a risk of the market moving against them when
conducting a large order, or battling high-frequency traders.
Twitter: @afrjackrabbit
The Australian Financial Review