European dark pools expand in face of rules limiting their use

London

STOCK trading grew faster in European dark pools last year than it did on public exchanges, signalling that a regulatory campaign to clamp down on the practice is struggling to change behaviour.

The region's dark pools - venues that don't display prices before trades take place - enjoyed a 45 per cent jump in the value of trading they handled in 2015, according to broker and equity-market operator Investment Technology Group Inc (ITG). Public exchanges saw a 28 per cent increase.

Dark venues 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 if dark pools grab a sizeable share of equity trading. At the same time, US regulators have fined several dark venues, including ITG, for rule breaking.

"It's a continuation of a trend that we've seen since these platforms launched," said Rob Boardman, CEO of ITG's European arm. "The buy-side finds significant value in dark liquidity, and we expect that this demand will continue."

ITG's data doesn't include bank-run pools known as broker- crossing networks, which match trades between the bank's customers. EU regulations will eventually require banks to phase out these pools or convert them into regulated platforms.

The data captures activity on European equity venues called multilateral-trading facilities, or MTFs. Dark trading on MTFs increased to 6.6 per cent of the overall European stock market in 2015 from 5.7 per cent 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 set of new regulations, called MiFID II. Each dark pool will be able to handle only 4 per cent of overall trading in an individual security. Total dark trading will be restricted to 8 per cent of volume per stock. Breaching the caps will lead to trading being suspended.

Five years ago, dark pools accounted for only 2.7 per cent 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 per cent by last December.

As their share of trading has increased, scrutiny over dark pools has also increased. Bloomberg News reported last September that Credit Suisse Group AG will pay more than US$80 million to settle allegations in the US that it failed to adequately inform customers of how its Crossfinder dark pool operated. Last August, ITG said it would pay US$20.3 million after US 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.

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 last October that prioritises size over speed. BLOOMBERG