(Bloomberg) — Norways $890 billion wealth fund will work to promote the rise of utility-like venues to make its biggest trades to avoid front-running and bring down the costs of stock transactions.
In what it calls a technological arms race in equity trading, the fund anticipates a growing use of non-exchange trading pools by institutional investors seeking to avoid broker costs and trade ever larger blocks, according to a report published Friday on the Oslo-based investors website.
A major issue now is a liquidity fragmentation as pools compete against each other on fees and services, according to the fund.
This can increase the search cost for buy-side traders, to the detriment of investors, the fund said. We therefore support the development of utility-like block crossing venues, which would serve to limit the possibility of rapid changes in relative market share, and to increase the fill probability.
The fund, which holds about $517 billion in stocks globally, also said it was concerned over toxicity and information leakage of several dark pools used in algorithmic trading. It has introduced a white list of permitted pools, which excludes high-frequency trading ping destinations, and actively takes into account client tiering systems that brokers commonly offer for their own liquidity pools.
Oeyvind Schanke, head of the funds asset strategies, said in a November interview that it dodges traders in the U.S. that are front-running by using fewer algorithms and trading in large blocks. The investors biggest challenge in the U.S. is the fragmented market structure, which has driven up costs across as many as 52 trading venues, introducing a latency overcharge, according to Schanke.
Asset owners and managers need to show continued vigilance and a proactive research-based approach to analysing and adjusting potential excesses, the fund said.
