European Dark Pools Expand, Spiting Regulators Ambitions

(Bloomberg) — Stock trading grew faster in Europeandark poolslast year than it did on public exchanges, signaling that a regulatory campaign to clamp down on the practice is struggling to change behavior.

The regionsdark pools— venues that dont display prices before trades take place — enjoyed a 45 percent jump inthe value of trading they handled in 2015, according to broker and equity-market operator Investment Technology Group Inc. Public exchanges saw a 28 percent increase.

Darkvenues are expanding more quickly than their lit counterparts, even though the European Union is planning to impose tough restrictions on them. The EU institutions are concerned that public markets will become less efficient and share prices less accurate ifdark poolsgrab a sizable share of equity trading. At the same time, U.S. regulators have fined severaldarkvenues, including ITG, for rule breaking.

Its a continuation of a trend that weve seen since these platforms launched, said Rob Boardman, chief executive officer of ITGs European arm. The buy-side finds significant value indarkliquidity, and we expect that this demand will continue.

ITGs data doesnt include bank-runpoolsknown as broker- crossing networks, which match trades between the banks customers. EU regulations will eventually require banks to phase out thesepoolsor convert them into regulated platforms.


The data capture activity on European equity venues called multilateral-trading facilities, or MTFs.Darktrading on MTFs increased to 6.6 percent of the overall European stock market in 2015 from 5.7 percent in 2014, according to data from Fidessa Group Plc.

The EU will introduce a limit on the amount of off-exchange trading in any individual stock under a package of new regulations, called MiFID II. Eachdarkpool will only be able to handle 4 percent of overall trading in an individual security. Totaldarktrading will be restricted to 8 percent of volume per stock. Breaching the caps will lead to trading being suspended.

Five years ago,dark poolsaccounted for only 2.7 percent of European trading, according to data from Bats Chi-X Europe, which runs the biggest pan-European stock market. That number had risen to 7.5 percent as of December.

As their share of trading has increased, scrutiny overdark poolshas also increased.

Bloomberg News reported in September that Credit Suisse Group AG will pay more than $80 million to settle allegations in the U.S. that it failed to adequately inform customers of how its Crossfinderdarkpool operated. In August, ITG said it would pay $20.3 million after U.S. regulators found it traded against its customers without ever disclosing the conflict.

Crucially, the incoming European rules exempt trades deemed large-in-scale. The restrictions are scheduled to start at the beginning of next year, though they are widely expected to be delayed until 2018.

Its not surprising that there hasnt been a decrease indarktrading, said Anish Puaar, European market structure analyst at Rosenblatt Securities Inc. Nobody is going to change now for a rule thats probably not coming until 2018.

Stock exchanges, from London Stock Exchange Group Plc to Deutsche Boerse AG, have developed orders meant to attract block trades to their markets. Bats Chi-X Europe introduced an order book in October that prioritizes size over speed.