Liquidnet survey: Global dark pool use set to grow despite financial crisis

22 April 2009

The growth in the use of dark pools by the buy side is set to grow significantly during 2009 according to a global survey of investors undertaken by Liquidnet, the global institutional marketplace for equities trading.

Despite the recent decrease in exchange trade volumes, the report found that the majority of participants globally are planning to increase their use of dark pools, with 54% of those questioned predicting an increase, and only 7% foreseeing a decline in their dark pool volumes. Nearly three quarters (73%) of European participants questioned plan to increase their use of dark pools this year, compared to 58% in Asia and 52% in North America.

The findings are published in Liquidnet's annual Buy-Side Voice report, a survey of 590 market participants including Liquidnet's buy-side trading Members, as well as non-Member industry professionals including other buy-side traders, sell-side traders, analysts and portfolio managers. The report investigates the implications of major changes affecting the marketplace in the wake of the financial crisis, such as the impact of short selling restrictions, and provides insights on products and desk tools such as the use of algorithms and methods of best execution.

The report suggests that MiFID has not been wholly successful in ensuring access to instant liquidity in Europe. Despite the introduction of a number of new platforms in the wake of MiFID, 40% of European respondents said that their access to instant liquidity has actually decreased since the directive came in to force in November 2007.

The survey also investigated attitudes of the buy-side towards the sell-side, contrasting recent joiners to the asset management industry to long-term professionals. A third (33%) of respondents with less than five years of trading experience believes that the sell side can be replaced with technology, while those with considerable trading experience value the broker relationship more highly. 67% of respondents with more than 30 years' trading experience do not believe they can eliminate contact with the sell side, compared to just 46% of respondents with less than five years' experience.

John Barker, Managing Director, Liquidnet Europe, said,

"This survey backs up our own data, showing that block trading activity looks set to remain robust, despite declining market volumes on exchange in the wake of the financial crisis. Dark pool trading is not a new phenomenon, but as this report shows, it is increasingly finding favour amongst institutional traders keen on reducing trading costs. Buy-side investors, who wish to trade larger order sizes without worrying about moving the market in the process, frequently find that they are able to achieve best execution via undisplayed, or latent, liquidity.

"It is noteworthy that traders in Europe feel that MiFID has had a negative impact on their ability to access to instant liquidity. The survey suggests that the advent of new trading venues such as MTFs means that traders are concerned about their access to trading opportunities in a more fragmented marketplace."

Other findings from the survey include:

* 43% of respondents use 1-3 algorithm providers, 12% use 4-5 providers, 26% use 6-9 providers, and 19% use 10 or more algorithm providers
* The majority of North American (68%) and European (67%) respondents are familiar and interested in actionable Indications of Interest (IOIs), compared to Asia where the majority of respondents (56%) were unfamiliar with actionable IOIs
* Approximately 35% of respondents state that short selling restrictions have hindered them as a trader, resulting in decreased liquidity and increased spreads.

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development