Dark on the Rise

Terry Flanagan

Off-exchange, dark trading in Canada has been on the rise despite ongoing macro-uncertainty.

Canada has been slow to adopt dark trading, especially compared to the U.S., where it hit an all-time high market share of 13.5% in January. At the start of 2011, dark trading in Canada was about 1.5% of overall Canadian equities. It currently stands at 4.5%.

“The tools are getting more sophisticated and clients are getting more sophisticated,” Nick Thadaney, chief executive officer of ITG Canada, told Markets Media. “They are getting more comfortable with dark trading as well.”

ITG Canada subsidiary, TriAct, runs the Match Now dark pool in Canada, which is currently the largest by market share with 2.2% of consolidated volume, according to data compiled by Rosenblatt Securities.

During the spike in volatility seen during the late summer months, dark trading in the U.S. and to an extent Europe, saw a substantial decline, as traders returned to the perceived safety of exchanges. In September, dark trading in the U.S. dropped to less than 11% before returning to 13.5% in January.

In Canada, dark trading increased alongside the upshot in market volatility. When the CBOE Market Volatility Index reached highs in August and September, market share went from less than 2% to nearly 4% within a few months.

While this can partially be reasoned on traders becoming more sophisticated and comfortable with the available tools, this jump also coincided with the launch of Alpha Group’s Intraspread dark pool. Being that Alpha is backed by some of the largest financial institutions in Canada, it was quickly able to see significant trading activity shortly after its launch. As of January, it was right behind Match Now in terms of market share at 2%.

While electronic dark trading is getting the attention, traditional “upstairs trading,” which many consider to be the precursor to modern dark trading, remains a substantial portion of daily trading volume. While there are no official figures, Thadaney estimates that it is as high as 15% of trading.

Japan, like Canada, has also been slow to embrace dark trading, but that is also showing signs of changing. Dark trading on proprietary trading systems (PTS) in Japan was about 8% as of late 2011.

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