MARKETS SPECTATOR: Dark pools ripple from a Centre Point

Few topics are as sensitive to those on the trading floors as the so-called dark pools.

Most investment banks that are serious about serving their fund manager clients have dark pools. ASX Ltd chief executive Elmer Kupper says between 25 to 30 per cent of all share trading in Australia occurs in dark pool trading venues that match buyers and sellers anonymously. And the ASX has gotten in on the act with its own dark pool venue, Centre Point.

Kupper says 11 per cent of dark pool trading happens as large block trades and 11 per cent are not large block trades, often in the hundreds rather than tens of millions of dollars. Last month Centre Point accounted for 3.7 per cent of all market trading, says Kupper, while 69 per cent was done in the ASX’s lit book, Trade Match.  

But the ASX’s dark pool is attracting more investors, much to the annoyance of the investment banks who formed their own dark pools before the ASX. On May 2, Centre Point accounted for 5.4 per cent or $178.9 million of that day’s trades. On May 10, Centre Point accounted for 5 per cent of the day’s trades, but its total volume was $203.6 million. On May 16, Centre Point did $218.8 million worth of trades, or 4.6 per cent of the market. On May 23, Centre Point did $251 million or 4.3 per cent of the day’s trades.    

Since Monday, figures are not yet available on trading activity this week from the ASX, one trader reports their own dark pool orders have collapsed while those of Centre Point have increased.

The Australian Securities and Investment Commission’s efforts to enforce mid-point execution has had a positive impact on reducing dark pool execution, traders say. But the ASX’s efforts to encourage trading at Centre Point has attracted more high-frequency trading into the exchange’s own dark pool than in its lit market, according to one trader.

High-frequency trading is now integral to the market. Of all Australian stock orders, 99.6 per cent are generated by automated order processing systems, according to a person familiar with the matter. Only a small number of such trades, 3.6 per cent, are small, fleeting orders that have been problematic, the trader says.

Algorithmic traders sometimes are not aware of the problems they are causing, the trader says. There has been unjustified hysteria over high-frequency trading, some argue. A recent confidential study of high-frequency trading in the Australian market over a nine-month period found that at least three high-frequency trading firms stopped doing business. Perhaps high-frequency trading has reached its peak.

It’s unlikely that dark pool trading is declining. Investment banks say their customers are demanding that trades be done in dark pools to improve execution. The ASX’s Kupper says quality lit markets are “crucial for price discovery and capital formation”. But dark pools may be getting more popular with everyone, including individual investors who may use the ASX’s own Centre Point now that the Australian Securities and Investments Commission has decided not to bring in a rule whereby dark pool trades could only be done if it was of a certain size.