Turquoise on Monday became the latest trading platform to tackle the increasing fragmentation of liquidity in European equity markets, saying it had received UK regulatory approval for a new service that aggregates large orders and routes them out to other trading venues.
The service, known as TQ Channel, is the latest initiative by Turquoise, founded by nine banks, to boost its share of trading amid weak volumes and competition from rival platforms.
Turquoise said TQ Channel would provide “a single point of access” to dark pools operated by banks and specialist brokers for its members. It would start in early July.
Dark pools – also known as “non-displayed liquidity venues” or “crossing networks” – are growing in popularity among institutional traders. They seek to execute large blocks of shares away from the public order book of an exchange.
The growth of algorithmic trading and ultra-fast trading systems have led to orders being sliced into ever-smaller sizes on public order books – also known as “lit” markets.
Lit markets are unattractive for such traders because large orders are immediately visible to rival traders, putting the initiator of a trade at a potential price disadvantage.
TQ Channel would take in large orders from Turquoise’s bank and brokerage members, divide them into smaller orders, and use trading algorithms to route those orders outwards to banks and specialist trading firms that already operate their own crossing networks.
Large orders are often divided into smaller ones because it is unusual for large orders to encounter a matching trade of the same size in a single dark pool. The likelihood of an order being carried out increases if it is split up. Turquoise aims to take advantage of this with TQ Channel’s order routing facility.
In effect, Turquoise will act as a broker – a further sign of the blurring of the distinction between exchanges, trading platforms and brokers.
The move comes after a similar one last week by Goldman Sachs, Morgan Stanley and UBS, which agreed to allow reciprocal access to each other’s dark pool block trading facilities for the first time in Europe.
Eli Lederman, Turquoise chief executive, said: “The principle is that any single broker is going to have lower crossing rates because it’s just them. What we are doing is re-aggregating the non-displayed liquidity that would exist in many brokers and using our position in the centre to do it.
“It recognises the increasing importance of non-displayed liquidity and it re-aggregates that non-displayed liquidity in a way that makes it more navigable to institutional players,” he told the Financial Times.
The London Stock Exchange will on Wednesday reveal more about its own planned dark pool, Baikal. That will include an order-routing facility and, similarly, will give the LSE a broker-like role for the first time.
In a further sign of the popularity of dark pools, UBS on Monday said it would launch a version of its UBS Price Improvement Network (PIN) “crossing platform” in Hong Kong.
UBS PIN would be available, automatically, each time UBS clients entered an equities order for Hong Kong securities through the bank, without the need for any new technological connections.
Also on Monday, Pipeline Financial, a US-based dark pool operator, said it had appointed Euro CCP – owned by The Depository Trust & Clearing Corporation of the US – and BNP Paribas to provide clearing services for its planned European dark pool.