Dark pools boost trade sizes to rise above EU caps

The operators of European dark pools are stepping up efforts to encourage larger institutional orders because forthcoming European Union caps on dark pool volumes will not apply to large trades.

Turquoise, the equity market majority-owned by the London Stock Exchange, on Monday started a new service to facilitate block trades. It is designed for institutional investors and allows Turquoise members to issue a “block indication”, announcing interest in buying a large order of a given stock. If a matching block indication is found, the two parties are asked to complete the trade.

James Baugh, head of sales at Turquoise, said seven companies had committed to using the service at launch, including JP Morgan, Instinet, Barclays and Societe Generale.

Three weeks ago, JP Morgan introduced a “conditional order type” for institutional clients that works in the same way. The service, common in the US, lets institutional investors leave a large-sized non-firm order resting in the bank’s European dark pool, JPM-X.

It starts trading the order algorithmically in smaller trades, but if a match for the block order is found the smaller trades are cancelled and the block trade is automatically completed at the mid-point price.
Bank of America Merrill Lynch is consulting its clients about introducing a similar service, a person familiar with the situation said. The bank declined to comment further.

Unlike normal “lit” exchanges, dark pools do not reveal full information about an order before it is completed, allowing institutional investors to make large trades without moving the price.
Under European rules, however, many dark pools must offer access to all types of participants, including high-frequency trading companies. The presence of HFTs and the growing use of algorithms by buy-side firms have steadily driven down the average size of trades on dark pools.
Brian Pomraning, head of electronic client solutions at JP Morgan, said JPM-X did not admit HFT firms and that the new service was “reacting to a pent-up demand among our institutional clients for block liquidity in the dark”.

Turquoise said that members found abusing its block indication service would be suspended from access to it. It already has in place other services to encourage large trades on its dark pool, including Uncross, a system of randomised auctions, as well as order matching on a size priority.