Dark Liquidity Pools in Europe, Canada, and Japan: A US Phenomenon Goes Abroad

3 December 2007

Traders are increasingly embracing dark liquidity pools as destinations to get large equities orders filled in the US and Canada. In this second act, many dark liquidity providers are taking their shows on the road to both Asia and the post-MiFID European marketplace. However, it remains unclear at this stage whether widespread adoption is going to become a reality, according to a new report, “Dark Liquidity Pools in Europe, Canada, and Japan: A US Phenomenon Goes Abroad” from Celent, a Boston-based financial research and consulting firm.

Key findings of the report include:

• Broker- and exchange-sponsored dark liquidity pools account for approximately 7-10% of US equities share volume and are growing. If one were to include dealer internalization systems, which are considered a separate breed of dark pool, the estimate would be higher, perhaps 12—15% of share volume.

• In Canada, ATSs and dark pools account for less than 0.22% of the market, but have really been active only since 2006. Liquidnet currently leads the pack, although Perimeter Financial BlockBook and TriAct Match Now (ITG) are also present.

• In Japan, there are currently four PTS organizations, and even though some have been in operation for over six years, their daily market penetration of dark pools is very low at present. Current trading volumes in PTSs are 30,000 to 40,000 shares a day, or less than 0.1% of daily flow, with only Instinet doing much in this market.

• In the US, the broker dark liquidity pools account for approximately 8% of equities volumes (500 million shares per day). However, currently dark liquidity pools account for negligible volumes in the European equities market. ATSs have not been able to garner much interest and have captured less than 1% of trading volume.

• Hidden orders on US ECNs are more representative of dark liquidity than icebergs since no portion of the order is displayed. For these order types, which offer degrees of anonymity and hide true order size, dark liquidity can be quite large. On Nasdaq, for example, 15—20% of the volume has been estimated to be generated from hidden order types. On Euronext, iceberg orders account for more than 50% of the liquidity at the best five quotes and 30% of the liquidity at the inside quote, indicating that the use of dark orders is extensive.

• US exchanges and ECNs have very low trade size in terms of shares, with the average at Nasdaq and NYSE at approximately 300—400 shares per trade. However, a crossing system will generally have an average trade size of 10,000 shares, with some systems such as NYFIX Millennium and ITG Posit offering lower size executions, and Liquidnet and Pipeline offering much larger executions.

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