Block Trading on the Rise in Canada

Terry Flanagan

Although dark block trading has been slow to catch on in Canada, signs are starting to point toward a more widespread adoption of the practice.

“We are seeing a lot of strong institutional support for a wholesale marketplace,” Robert Young, managing director of Liquidnet Canada, told Markets Media.

Liquidnet posted record growth in Canada during 2011, with trading volume increasing 60% year-over-year, with its client base consisting entirely of institutions. This is in contrast to the Canadian equities market as a whole, which saw a 6% increase. The TSX declined 1% at the same time and the Venture exchange declined 4%.

At the start of 2011, dark trading was about 1.5% of overall Canadian equities. Over the next 12 months that grew to over 5%, more than tripling. Dark trading accounts for about 11% of equities volume in the U.S.

Liquidnet often touts its large average execution size, which is close to 50,000 shares in the U.S. and about 64,000 in Canada. Large block trading is otherwise difficult to accomplish on a lit exchange without impacting the markets.

Goldman Sachs recently launched its Sigma X dark trading platform to Canada, in the face of increasing regulatory scrutiny for dark pools in the nation, with agencies including the Investment Industry Regulatory Organization of Canada and the Ontario Securities Commission looking to impose certain guidelines to reign in such venues.

Some market participants have noted that Canada is taking a more in depth approach with its view on dark trading. One trading venue executive noted that “before the Canadian market and regulators go into one direction or another regarding dark,” that it would be best to “do some very thorough and serious research.” The U.S. financial markets were also initially very reluctant to dark trading, citing the lack of transparency and price discovery, but the industry has slowly been accepting the practice over time.

Liquidnet and other dark liquidity pools are marketplaces where institutions and asset managers can execute large block trades anonymously and without market impact.

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