The topic of trading equities away from exchanges somehow got so much sexier when some bright spark devised the tag ” dark liquidity pools” to describe this activity.
Perhaps this is just as well, writes Gillian Tett. For what is emerging in these alternative share-trading venues does deserve much wider attention from investors, especially, but not exclusively, in Europe.
The introduction of MiFid later this year will make it much easier for investors to trade shares away from a stock exchange. Indeed, European investors, particularly in London, are already starting to trade using investment banks’ internal books. And seven investment banks are now threatening to launch a trading network to rival the LSE, known by the cheery tag of “Project Turquoise”.
The LSE can claim to have seen these threats before – but the fact that the US has already seen an explosion of dark liquidity pools since it changed its regulations a couple of years ago, is giving greater momentum to the move away from exchanges.
Moreover, what could provide a particularly pernicious challenge to platforms such as the LSE is an ongoing change in investor mentality. As NET2S, another consultancy, points out, the spectre of dark liquidity currently comes in three forms: alternative trading networks; order matching on an investment bank’s book, and direct buyside-to-buyside deals.
NET2S suspects the third category could be most important. This, in a sense, is the darkest of the dark liquidity — and NET2S thinks it will explode. As a result, it guesses that in five years’ time, around half of all equity trading will occur within dark liquidity pools; equity markets, in other words, are heading towards a major wave of fragmentation.
If buyside-to-buyside activity does swell, it is not just exchanges who could suffer; investment banks may feel the effects as well.