Big fund managers form new dark pool equity trading venue

Nine of the world’s largest fund managers are launching a new dark pool for equity trading, in an attempt to prevent high-frequency firms from disrupting their trades and raising costs.

The project, which is being led by Fidelity, will be the first buy-side-to-buy-side trading venue and will be designed for only the very largest equity trades.

The venue is to be called Luminex, and is due to be formed this week by a consortium of companies that also includes BlackRock, Capital Group, MFS, Invesco, T Rowe Price, JPMorgan Asset Management, State Street and Bank of New York Mellon. The minority shareholders will each have 4.9 per cent, with the remaining 60 per cent held by Fidelity.

Details are still being ironed out with regulators in the US, with the launch expected in the second half of the year.

The fragmentation of equity trading across 13 public stock exchanges and another 50 alternate venues has caused frustration for large buyside firms, even as it has been credited by some with creating competition and lowering costs.

Firms have had to expand technology budgets to cope with the emergence of high-frequency traders (HFT), which use algorithms to sniff out when big buyers are in the market and which exploit the complexity of the current system to harvest millions of tiny trading profits.

Fidelity in particular has sharply expanded its technology spending to hide its trading intentions so as to avoid giving signals that HFT firms can exploit.

The development of Luminex reflects disappointment with other dark pools, many of which were designed to be a safe place for large investors to conduct their biggest trades, but which have increasingly opened up — or been infiltrated by — HFT firms.

Interactive

Dark pools ecosystem

Explaining the dynamics of the modern US share market

US regulators have been investigating whether dark pools are always being transparent to clients about the presence of HFT firms. The issue moved up the political agenda last year with the publication of Flash Boys by the author Michael Lewis, who claimed the US equity market was effectively “rigged” in favour of high-frequency firms.

Fidelity and other firms involved in Luminex declined to comment.

Most large asset managers already “internalise” whatever trades they can, so that funds that want to sell a particular stock are matched with funds that want to add that stock to their portfolios. Luminex would be a platform for combining forces, creating a larger pool of liquidity.

Before choosing the name Luminex, Fidelity had codenamed its dark pool “sakura”, after the Japanese word for cherry blossom.