European market reforms seen boosting dark pool trades

PUBLISHED : Sunday, 10 September, 2017, 4:22pm
UPDATED : Monday, 11 September, 2017, 11:34am

New market reforms in Europe are likely to boost demand for dark pool trades, which in turn may have a rippleeffect globally and change market behaviour in Hong Kong and the Asia region, according to independent dark pool operator Liquidnet.

The European Union’s new rule, known as Markets in Financial Instruments Directive II (MiFID II), is aimed at increasing transparency by requiring asset managers to pay for their investment research. Currently, banks and brokers have been offering such research as a “bundle” with other trading services.

The new rule, to be introduced in January 2018, means asset managers need to decide whether to absorb the cost of research themselves, or pass it on to clients, which in turn may cause them to review which brokers to engage with when sourcing liquidity and executing trades, market players said.

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“This will reshape the entire landscape, whether you are in Europe or in Hong Kong. Some services will die and some will get better,” said Seth Merrin, CEO and founder of Liquidnet. “This means there is an opportunity to leverage technology to provide a service that asset managers need but are no longer getting.”

One third of respondents said they plan to adjust their broker list ahead of January 2018, according to a survey based on 55 interviews with Liquidnet’s member network of asset managers in North America and Europe. Seventy per cent said they are now reviewing new liquidity providers outside their traditional broker relationships. The survey was conducted between April and May.

“We believe there will be more demand for block trades if best execution practice is going to be the way of life,” head of Liquidnet Asia Pacific Lee Porter said, adding that trading in a block is one of the most efficient ways to trade.

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Liquidnet specialises in so-called dark pool trades that are conducted on its platform and kept confidential from the general investing public. Orders of large quantities, or “blocks”, of securities are conducted as Liquidnet connects almost 1,000 asset managers globally, contributing their liquidity into one centralised pool. The global average daily liquidity amount is US$80 billion.

Liquidnet’s European equity trading business rose by 38 per cent in the first half as clients prepared for MiFID II, Porter said. That compares with a 20 per cent year on year rise in its trading volume in Hong Kong, which is its biggest market in Asia.

The impact of MiFID II implementation will extend beyond Europe’s borders as international asset managers, and their underlying asset owners such as pension funds, adopt a common approach globally, Porter said.