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Institutional traders increase volume of equities executed in the dark

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The long-only investor has returned to the European equities markets and as a result so has the volume of European equities executed in the dark, according to TABB Group research.

 
Institutional market share increased nearly 19 per cent in 2012, and in the first six months of 2013 to almost 21 per cent of European notional turnover, following a continued decline since 2009.
 
“While the imposition of greater European regulation would appear to be having the desired effect, the reality is that the longer term prognosis, particularly for institutional order execution is bleak,” says Rebecca Healey, a TABB senior analyst in London and author of European Equity Trends: 2013 Mid-Year Review.
 
As a result, institutional traders are increasing the volume of flow they execute in the dark with volumes now in access of 10 per cent in Europe for the first time.
 
Further European regulation, currently under negotiation in the Markets in Financial Instruments Directive (MiFID) II in trialogue this autumn – in particular legislation concerning dark pool activity – could have even greater consequences, leading to structural changes in investment strategies, as well as implications for execution. 
 
Although institutional investors are returning to European equity markets with the FTSEurofirst 300 Index up over 18 per cent and the IPO market resuming its recovery in the second quarter, Healey says that high-frequency and statistical arbitrage strategies have declined relative to long-only activity, with independent high-frequency trading activity falling to just under 14 per cent in the first half of 2013.
 
“The ability for long-only investors to execute order flow remains severely constrained. Electronic market making is in decline in conjunction with the relative reduction in model-driven flow. We also see that underlying market fundamentals and lack of volatility have further reduced appetite for latency-centric strategies, creating a static market for all but the most liquid of names,” says Healey. 
    
The impact of depleted margins and bank deleveraging on institutional investors’ ability to trade on risk, combined with the Financial Transaction taxes (FTT) impact on the availability of executable liquidity is reshaping European market structure.
 
With execution costs being scrutinised and a reduction in block activity, TABB Group believes that further automation is required. “Firms are turning to dark strategies to limit market impact”, Healey says, pointing out that the use of dark multilateral trading facility (MTF) order books has almost doubled since 2011 – the top three dark MTF venues now account for almost 70 per cent of all dark volumes traded – while activity in broker-crossing systems appears to be plateauing. Specifically, she says, Turquoise and BATS Chi-X Europe reached 33 per cent of equity volumes traded in June 2013, versus 44.92 per cent traded on the three major exchanges combined, London Stock Exchange, Euronext and Deutsche Börse.
 
The report also shows that there’s increasing divergence within the Eurozone. Germany and the UK’s market share are increasing to over 20 per cent versus a continued decline in market share for Italy and France. France’s market share of 21 per cent ahead of the FTT declined to slightly more than 12 per cent in July 2013. Italian equity turnover has dropped from EUR101bn to just EUR50bn.
 
Europe remains at a crossroads, says Healey. “The tide may slowly be turning. Politicians may be losing their stranglehold on financial markets, but regulation remains the key factor in any European recovery. Regardless of any positive momentum, we’re still reliant on the final outcome of the latest legislation, in particular MiFID II, due to be completed in trialogue by the end of the year.”

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