The volume of equity deals carried out in so-called dark pools in Europe has surpassed 10 percent in the first half of the year, according to capital markets research firm TABB Group.
The group says the European share of equities dealing carried out in the form of institutional trades increased sharply in 2012 – a rise that has continued so far in 2013. This comes after a decline following the financial crash of 2008, due to increasing regulation and efforts to control electronic trading. Institutional trades now account for 21 percent of ‘notional market turnover’, TABB reports.
‘While the imposition of greater European regulation would appear to be having the desired effect, the reality is that the longer-term prognosis, particularly for institutional order execution, is bleak,’ says Rebecca Healey, a TABB senior analyst in London and author of the group’s report on European equities. ‘As a result, institutional traders are increasing the volume of flow they execute in the dark, with volumes now in excess of 10 percent in Europe for the first time.’
Healey warns that tightening regulation and government efforts to increase transparency may further encourage the growth of dark pools, where traders operate anonymously to limit price reactions in the rest of the market.
‘The ability of long-only investors to execute order flow remains severely constrained,’ Healey says. ‘Electronic market making is in decline in conjunction with the relative reduction in model-driven flow. We also see underlying market fundamentals and lack of volatility have further reduced appetite for latency-centric strategies, creating a static market for all but the most liquid of names.’
The report further shows the European equities market share of the UK and Germany has risen to more than 20 percent each, while France’s market share has declined from 21 percent to 12 percent since the country implemented its Financial Transactions Tax.
