The London Stock Exchange is for the first time set to allow traders to place “hidden orders” on the exchange in a move likely to fuel controversy over “dark pools” and market transparency.
Hidden orders are large orders – for example of 20,000 shares in a particular stock – placed on a trading venue but where only a fraction of the whole order is displayed. When that fraction – for example 5,000 shares – finds a match, the next fraction of the order is immediately displayed.
Traders use this method as a way of ensuring that large orders are done without revealing the whole order to the broader market, which could move against them if the full size of the order was known.
The hiding of orders is a common feature of dark pools, which have grown in popularity as a way to carry out large orders with prices posted only after trades are done.
Dark pools have come under scrutiny from the US Securities and Exchange Commission amid questions over price transparency. The watchdog last month proposed a rule that would require participants in dark pools to display their best prices to the wider market if their orders account for 0.25 per cent or more of a dark pool’s volume, rather than 5 per cent currently.
The LSE said in a note to members on Friday that it would allow traders to place hidden orders on its order book from December 1 to “enable customers to execute larger sized orders on the central order book, with the opportunity for mid-price execution”.
Deutsche Börse, the German exchange, launched hidden orders in September.
The moves are an attempt to attract liquidity from wherever exchanges can find it, at a time of increasing fragmentation of trading across multiple venues such as Chi-X Europe and dark pools operated by such platforms, by banks and by independent operators.
The LSE has plans for a dark pool of its own, known as Baikal, but this is expected to be folded into Turquoise, another trading platform whose shareholders are in talks with the LSE about merging the two businesses.
It also said it would no longer levy its minimum charge of 10p per execution or trade, but instead per order.
The idea will cost the LSE £1.5m in annual revenue, but it hopes that the move will lower the overall costs of trading and attract volume.
The LSE is following up on its promise to tweak its tariff structure on a more regular basis in order to ensure it is more responsive to customers.
