Nomura to shed light on dark pools
Nomura, the Japanese bank, plans to launch what would be the first bank-owned ”dark pool” in Europe to reveal publicly what trades have been done in a bid to ”remove the mystery” from such increasingly controversial trading facilities.
Dark pools, which allow the anonymous matching of trades with prices posted only after deals are finalised, have come under scrutiny by US and European regulators amid questions over their transparency.
In Europe, there is added concern that a lack of an industry-wide standard on how dark pool prices should be reported post-trade is hampering investors’ ability to judge where the best prices for trades are likely to be.
Dark pools fall into three categories: those operated by exchanges; independent companies; and by banks such as Nomura and larger rivals like Credit Suisse, Goldman Sachs and Morgan Stanley. Bank dark pools are also known as ”crossing networks”.
Nomura said it would convert its existing NX crossing network into a multilateral trading facility (MTF), a legal structure created by the Markets in Financial Instruments Directive that is used by trading platforms like Chi-X Europe and Turquoise. It is also used by some independent broker dark pools.
Such a status will require NX to reveal the trades done on NX and the price. Currently non-MTF dark pools and crossing networks report – or ”print” – prices after trades are done to specialist reporting services, mainly Markit Boat. However they are not required to identify where the trades were done and appear mixed in with other types of over-the-counter trades.
Andrew Bowley, head of electronic trading product management for Europe at Nomura, told the Financial Times: ”We’re trying to remove the mystery around the dark pool space. This will give some clarity as to what happens in our dark pool.”
In addition, NX would not allow trades to proceed if the size of the bid and of the offer in the “lit” reference market were ”materially imbalanced” – that is, if one was significantly larger than the other. It would also allow customers to set a minimum size at which an order could be done.
NX, which will be launched next month, will include stocks listed on London’s Alternative Investment Market and will be regulated by the Financial Services Authority. It will offer trading in 7,000 shares across 14 market indices in Europe.
Nomura’s move comes as bank crossing networks have become a flashpoint between banks and exchanges. The Federation of European Securities Exchanges argues that they have an unfair advantage over exchanges because they do not face the same regulatory obligations as exchanges. FESE has called for crossing networks to be registered as MTFs, arguing that they have become a ”significant part” of the off-exchange equities markets.
The banks reject FESE’s claims, saying their dark pools are fully regulated and that they account for around 3 per cent of Europe-wide equity markets.
The Committee of European Securities Regulators is studying the issue and has asked both sides for numbers to back up their claims. Eddy Wymeersch, CESR chairman, said last week “we have very contradictory figures with regard to dark pools”. He added: ”The question of what a dark pool is, is very confusing.”