17 SEPTEMBER 2019

Dark-Pool Trade Size Doubles in Europe as Venues Hunt Blocks

In response to banks' demand, SIX is to establish a central trade repository for derivative transactions in Switzerland.

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Even before new regulations revamp trading in 2017, Europe’s private stock markets are already returning to their original purpose: handling big trades.

The average size of trades on European dark pools doubled to 11,403 euros ($13,050) in December from a low of 5,652 euros in May 2012, according to Fidessa Group Plc. The number of shares per trade rose 50 percent to 1,161 over that period. Years after they were set up to handle big trades purportedly ill-suited for public exchanges, dark pools drifted away from that goal and started handling more and more routine buying and selling, including small trades on behalf of individual investors. While the European Union’s limits on dark-pool trading only take effect in 2017, the Fidessa data shows that the shift has already begun.

“The market has woken up to the fact that relentlessly slicing and dicing isn’t always best,” said Rebecca Healey, market structure analyst at Tabb Group LLC in London. London Stock Exchange Group Plc’s Turquoise market and a consortium called Plato Partnership Ltd. are among the venues seeking to attract the largest trades. Other market operators, such as Investment Technology Group Inc. and Liquidnet Holdings Inc., have chased big transactions for years.

The upcoming EU rules exempt orders deemed “large in scale” from the limits on dark-pool trading. The average trade size has also risen because investors are taking greater interest in what happens to their orders, while the likelihood of finding a match for a large trade increases as more so-called block orders become available, Tabb’s Healey said.

‘Little Impact’

“Blocks for us are getting more and more important,” said Lutz Kalthoff, team head for European equity trading at Allianz Global Investors, which oversees 345 billion euros. “We’re large investors, so we have big orders that have to be executed in the market, and we’re trying to execute these orders with as little market impact as possible.”

Turquoise, which is majority owned by the LSE, launched a conditional order type last year. It allows users to offer to buy or sell a large block of stock while simultaneously looking for smaller trades should a big single transaction not be possible.

The average size of Turquoise trades using the Block-Discovery tool is more than 260,000 euros, compared with 9,000 euros for transactions made without the instrument. More than 22 percent of trades using Block Discovery qualify for the large-in-scale loophole, said LSE’s head of pan-European sales and marketing, James Baugh.

“We can clearly demonstrate that you can trade these large blocks electronically without any negative impact,” he added.

Block Rivalry

Turquoise has handled 9.1 percent of European equity volumes so far this month, while block-trading rivals ITG and Liquidnet account for 0.9 percent and 0.4 percent, respectively, according to data from Bats Global Markets Inc. The Plato venue has yet to start trading.

Algorithmic trading, which chops up orders, and higher volatility during euro area’s debt crisis helped push average trade sizes lower and lower before 2013, according to Mark Pumfrey, head of Liquidnet EMEA.

“The average position size at the big institutions has grown as markets have recovered, and the fund management industry has continued to consolidate,” he said.

Liquidnet caters to pension and mutual funds. The average size of European equity trades on its venue dropped to $900,000 in the final quarter of 2012, Pumfrey said. Last year, it reached $1.7 million, a record.
The company says that about 90 percent of its business qualifies for the large-in-scale waiver proposed by the new rules.

The dark pool handled 625 so-called mega blocks in 2014 -- trades worth at least $10 million.
It processed 400 in 2013.