Traders believe that dark pools have entered a “mature phase” and use them to avoid “toxic liquidity” from high-frequency trading firms but the size of the trades are getting smaller. These are among a few findings from a new report published by market research firm Celent.
It its report entitled Dark Pools: In the Eye of the Storm, Celent researchers found that traders are adopting a new attitude towards unlit trading venues. While regulators and critics cast a wary eye on dark pools, traders see them as solid and reliable trading systems.
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According to Celent, dark pools continue to be an acceptable method for trading. “Dark pools accounted for 14.7 percent of the total equity trading volumes in the US in June 2013, which has more than doubled from a share of 6.45 percent in 2008. In Europe, dark pools accounted for around 6 percent of the total equity trading in July 2013. The growth of trading on dark pools as a share of total equity trading volumes was higher in 2009 and 2010, with share of dark pool equity trading volumes increasing to 11.4 percent in 2010, compared to the growth in the last three years,” according to a Celent press statement describing a few findings of the report.
Celent also found that dark pools offer better prices than so-called lit exchanges. “The ability to trade at mid-point of the spread on lit venues offers price advantage, along with saving on exchange fees. However, there is a trade-off between taking a better price off-exchange and delaying in finding matching liquidity,” reports Celent.
While dark pool adoption may be on the rise, the order size is getting smaller both in the US and across the pond. “In the US, the average execution size has reduced from 430 shares in 2009 to around 200 shares currently. Increasing algorithmic handling of orders, along with lack of book depth on dark pools are important factors for the reduction in execution sizes. This raises an important question, especially from lit market operators’ point-of-view whether dark pools are causing liquidity to be hijacked from lit venues which would adversely affect the functioning of the equity markets,” according to Celent.
“Dark pools are an important component of market structure,” said Muralidhar Dasar, analyst with Celent’s Securities and Investments Group and main author of the report. “It is important to understand that forcing volumes away from dark pools to lit exchanges may not necessarily result in reduced trading costs and improved market quality.”
“All dark pools are not equal,” saidDavid Easthope, research director with Celent’s Securities & Investments Group and coauthor of the report. “A bid to control excessive trading at dark pools could adversely impact investors trading large blocks at specialized venues.”
