Canadian Dark Pools Poised for Growth?


The stage may be set for dark-pool trading to grow in Canada.

Dark pool trading is a much smaller component of the equity trading dynamic in the Great White North – as market structure and regulation dissuade traders from executing orders on unlit venues. Exchanges are the preferred and most widely accepted venues to trade on, grabbing upwards of 93% of total equity trading volume.

There are currently only three dark pools in operation in Canada.

In contrast, dark pool trading in the U.S. is scattered among more than 30 venues and totals upwards of 30% of total trading volume.

But that could well change, according to one executive who sees stagnant trading commissions and the buy side’s need to increase cost savings take center stage in Canadian trading. Bryan Blake, chief executive officer of ITG’s MatchNow dark pool in Canada, told Markets Media in an interview that the nascent state of dark trading in Canada makes it a prime place for expansion.

“There is room for innovation and growth in dark pools here in Canada,” Blake told Markets Media. “ There is room for more competition as dark pools can offer traders more price savings and price improvement.”

Blake noted that his supposition is supported by the recent introduction of Nasdaq’s CXD dark pool. Major players in the dark trading space in Canada are ITG’s Match Now, Liquidnet and Instinet ICX. Some exchange operators counter the dark pools by offering dark order types known locally as gray liquidity, just like in the U.S.

“The two pricing models employed in Canada – maker/taker and taker/maker can sometimes distort the market from a trader’s perspective,” Blake said. “We charge both sides of the trade and have saved our clients a total of $4 to $5 million [Canadian] dollars each month by trading at the midpoint.”

ITG’s clients are Investment Industry Regulatory Organization of Canada- registered broker dealers, who like both the simplicity and non-conflicted nature of ITG’s trading model, Blake said.

Blake was also quick to point out that there are some regulatory developments both north and south of the border that favor dark pools and in particular, MatchNow. As mentioned above, new scrutiny by IIROC, the Canadian Securities Association and Ontario Securities Association regarding payment for order flow and marketplace rebate incentives can help boost dark pool innovation when it comes to prici

ng schema, as it has already at MatchNow.

“Also, with the U.S. tick pilot coming soon and the inclusion of some inter-listed names in it has created a unique scenario where 32 inter-listed US/Canadian stocks can be traded in Canada in ticks smaller than the $0.05 mandated by the pilot,” Blake said.

The Tick Pilot is set to begin on October 3 and last for two years. The tick size pilot is a data-driven test to evaluate whether or not widening the tick size for securities of smaller capitalization companies would impact trading, liquidity, and market quality of those securities.

“55% of total Canadian trading volume is in inter-listed stocks,” Blake said, which he noted represents a great opportunity for dark pools to shine. “Customers want options when it comes to trading and in some cases, certain trading strategies might thrive in a dark pool environment.”

All of this bodes well for the dark pools – both ITG’s and its competitors. “All of this could lead to an uptick in dark trading volume,” Blake added.

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