03.02.2012

Instinet Targets Europe’s Growing Dark Pool Sector

03.02.2012
Terry Flanagan

Agency broker Instinet is looking to capitalise on the increasing use of dark pools in Europe by bringing its volume weighted average price trading system across the Atlantic.

New York-based Instinet, which operates numerous dark pools around the world, is expanding its VWAP Cross dark pool into Europe, as well as Hong Kong. It already operates the system in the U.S., Canada, Japan and South Korea.

Dark pools get their name as details of trades are concealed from the public, clouding the transactions like murky water. The platforms are used by institutional investors looking to trade large blocks of shares anonymously off-exchange without causing an adverse market impact.

Data from Rosenblatt Securities, a New York-based agency brokerage that tracks dark pool activity, reveals that European dark pools accounted for 4.6% of all equities traded in January, up from 2.9% from the same month a year earlier.

In the U.S., Rosenblatt said that dark pools matched 935 million shares a day, or 13.5% of the total stock changing hands in January. In percentage terms, this figure topped the prior market share record of 13.2% in April last year.

Commenting on the introduction of the VWAP platform in Europe, Richard Balarkas, chief executive of Instinet Europe, said: “Instinet’s European VWAP Cross will leverage our proprietary EBBO [European Best Bid and Offer] technology, giving participants access to the true volume weighted average price, including all the major displayed trading venues. We expect similar demand in Europe as we have already seen globally.”

Instinet’s matching system has been used in its current form in the U.S. since 2003 and has become the third largest source of block liquidity in the world, according to figures by Rosenblatt.

Most dark pools match orders within the spread created by the best available bid and offer or at the midpoint of those levels. VWAP is a moving price that incorporates the effect of trading in the market and is typically easier to achieve than buying shares at the offer price when the trader gets the order or selling at the best available bid.

Traders use VWAP crosses to try to ensure some of their buy or sell orders sent before the market opens are filled at the day’s average price. Big orders sent to regulated exchanges can be seen by others in the market, thus moving the price in the wrong direction, but orders to dark pools cannot be seen and do not move prices.

Frank Freitas, chief operating officer and global head of product strategy at Instinet, said: “Our existing VWAP Crosses have become an indispensable tool and liquidity source for benchmark-driven traders. We are pleased to extend our proven technology and process to satisfy the client demand for block VWAP liquidity in Europe and Hong Kong.”

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