Dark Liquidity Pools in Europe, Canada, and Japan: A US Phenomenon Goes Abroad

November 29, 2007


Boston, MA, USA November 29, 2007

Traders are increasingly embracing dark liquidity pools as destinations to get large equities orders filled in the US and Canada. In this second act, many dark liquidity providers are taking their shows on the road to both Asia and the post-MiFID European marketplace. However, it remains unclear at this stage whether widespread adoption is going to become a reality.

Dark liquidity pools are blind-book markets that have limited or no transparency on a pre-trade basis, and frequently on a post-trade basis as well, with the unusual goal to limit market impact from trading large blocks of securities due to information leakage. Dark liquidity pools are typically sponsored by a single broker, a consortium of brokers, or by a technology company that operates very similarly to a broker. Additionally, exchanges in the US have begun introducing their own dark liquidity pools in the form of continuous block crossing. Today, broker- and exchange-sponsored dark liquidity pools account for approximately 7-10% of US equities share volume and are growing.

In a new report, , Celent examines the current adoption of dark liquidity pools in the US, Canada, European markets, and Japan and provides insight into the potential future.

Currently, dark liquidity pools account for negligible volumes in the European equities market. Despite a flurry of market entrants in Europe including ITG Posit, Liquidnet, and NYFIX Euro Millennium, overall penetration is still fairly low. Over the long term, however, dark liquidity pools will offer incremental liquidity destinations and capabilities to the European equities market.

In Canada, alternative trading systems (ATSs) and dark pools account for a tiny percentage of the market but have only been active since 2006. Liquidnet currently leads the pack, although Perimeter Financial BlockBook and TriAct Match Now (ITG) are also present. In Japan, market penetration of dark pools is less than 0.1% of daily flow, with only Instinet making notable strides.

This report explores the various market models and successes of dark liquidity providers. Defining characteristics of these providers include openness to dealers, acceptance of algorithmic flow, share minimums, and types of matching systems. They determine the optimization of the dark pool for a particular type of trader and order type.

"Dark liquidity pools do not appeal to all types of traders and cannot replace all the features of exchanges," says David Easthope, senior analyst in Celent's Securities & Investments group and author of the report. "In the European markets, where it is really quite early for dark liquidity pools, exchanges will not stand and watch liquidity be siphoned off to these pools without a fight. However, dark liquidity pools have found a receptive audience in the Canadian equities markets in addition to the US. In Japan, adoption of dark pools is thought to be years away from being widespread."

This 34-page report contains ten figures and eight tables. A table of contents is available online. Members of Celent's Institutional Securities & Investments research service can download the report electronically by clicking on the icon to the left.  Non-members should contact info@celent.com for more information.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
Tel: +1 212 345 1366

Europe (London)
Chris Williams
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
Tel.: +81 3 3500 3023

Table of Contents

Boston, MA, USA November 29, 2007


Executive Summary 03
Background 04
Dark Liquidity Pools Defined 06
Emergence of Dark Liquidity Pools in the US 08
Leading Dark Liquidity Players 10
  Market Breakdown 10
  Hidden and Iceberg/Reserve Orders 10
  Dark Liquidity Matching Models 11
Market Acceptance of Dark Liquidity Pools 13
  Market Growth 13
Defining Characteristics of Dark Liquidity Pools 16
  Evaluation of Characteristics 17
The European Phenomenon 20
  Market Models for Europe 21
  European Presence 22
The Canadian Phenomenon 24
  Market Models for Canada 24
  Canadian Leaders 26
The Japanese Phenomenon 30
  Market Models for Japan 31
  Japanese Leaders 32
Concluding Thoughts 34


Sign in to download reports and access personalized information