Piecing together Europe’s dark liquidity
The continued growth of dark
trading in Europe calls for greater differentiation among algos that seek to
aggregate non-displayed liquidity for the buy-side, says William Capuzzi,
president of ConvergEx’s global execution franchise.
“There has been a
proliferation of dark liquidity in Europe that is tough to navigate because
most non-displayed multilateral trading facilities (MTFs) and broker crossing
networks (BCNs) do not interact with each other,” said Capuzzi. “This means
that buy-side firms need relationships with the largest bulge-bracket brokers
as well as the means to access dark MTFs, which is not an easy task.”
Unlike the vast majority of
dark liquidity aggregation algos which only source liquidity from dark MTFs,
agency broker and technology provider ConvergEx has agreements with 12 BCNs as
well as the dark MTFs which are part of its aggregator, Global Darkest.
With BCNs accounting for
45.98% of the €53.24 billion of dark trading conducted in May, according to
data provided by Thomson Reuters, this represents a valuable source of
liquidity for buy-side traders. Capuzzi says Global Darkest covers over 90% of
total dark liquidity in Europe, based on monthly BCN and MTF data provided by
US boutique broker Rosenblatt Securities. ConvergEx operates as a direct member
of each BCN it is connected to, meaning it has full visibility on where client
orders are sent and does not have to rely on onward routing.
One commonly cited benefit
of BCNs is the fact that buy-side traders can send orders to them in the
knowledge their operators are seeking best execution on their behalf. To
maintain control over how its own clients’ orders are handled, ConvergEx worked
with brokers to ensure orders sent to BCNs are only executed using
pre-specified order types.
“If all we are doing is
simply sending orders to BCNs, we are losing control over our flow,” said
Capuzzi. “We wanted to ensure that there was no onward routing by BCNs and that
our orders interacted with their dark liquidity only. We have a responsibility
to evaluate performance of each trade independent of the reports we receive
back from our broking partners.”
This includes anti-gaming
measures and how BCNs prioritise orders – if ConvergEx orders are not traded
against in favour of client flow or if orders are held up before entering the
The latest version of Global
Darkest was launched three months ago and forms part of ConvergEx’s global
execution offering. The extensive dark pool links the firm has established are
also incorporated within its Grey and Abraxas strategies.
Grey is a passive
strategy which uses pegged orders in both lit and dark markets, while Abraxas
is an aggressive liquidity-seeking strategy Capuzzi describes as a “smart
percentage of volume” strategy. Abraxas accesses all available dark liquidity
while selectively grabbing liquidity offered on displayed venues.
The firm’s execution
offering is connected to 55 different trading destinations globally and uses a
‘follow the sun’ approach. ConvergEx has regional desks that operate under the
same business line, allowing clients to send orders in for any market at any time
for execution by the appropriate desk.
“We foster close links
between our sales and trading teams to ensure that clients are using the right
strategies for the right trades and combine this with real-time transaction
cost analysis to offer full transparency to clients,” says Capuzzi.