Dark on the Rise in Canada

Terry Flanagan

Off-exchange, dark trading in Canada has been on the rise this past year after a particularly slow start.

Dark trading is on the rise in Canada, as evidenced by the increasing regulatory scrutiny as market share and trading volume becomes substantial.

“I see an industry which is clearly starting to shift its views,” Jos Schmitt, chief executive officer of Alpha Group, told Markets Media. “If you go back to the U.S., it was originally an industry that was reluctant to dark. Now I see that a majority of the industry is in favor of dark. There was a realization there that there is role for dark.

At the start of the year, dark trading constituted about 1.5% of overall Canadian equities trading volume. Over the next three quarters or so, that number grew to about 5%, essentially tripling. While it is substantially less than the 12% to 15% that dark trading makes up in the U.S., it shows that there is potential for growth in the space.

In anticipation of that, the Canadian regulatory authority Investment Industry Regulatory Organization of Canada, or IIROC, has released a set of proposals governing the regulation of dark trading. The rules framework includes provisions for minimum price improvement and size thresholds.

This is a result of industry concern in Canada, as far as what the impact is for off-exchange trading on visible markets and price discovery. Canada is in the early stages of dark trading compared to the U.S., as there are only a few venues and volumes are relatively low.

“It’s very critical in my eyes, that before we come to a final conclusion on how to approach dark in Canada, that we do some very thorough and serious research,” said Schmitt. “Before we go into one direction or another, let’s make sure we do our homework.”

The increase in dark trading in Canada also came during a time when the practice saw a decline in the U.S., at least in terms of high volatility. Dark pool trading in the U.S. reached as high at 13% during first quarter of the year. However, when the CBOE Volatility Index spiked to 48 in August, it declined, and was at less than 11% by September.

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