Dark MTF volumes tumble on information leakage fears
Trading in dark pools operated by multilateral trading facilities (MTFs) Chi-X Europe and BATS Europe fell today because of investors’ fears about potential information leakage from post-trade data feeds.
According to its own figures, BATS Europe’s dark pool traded €66.2 million by close of trading in Europe, compared to a three-day average of €73.78 million, while Chi-Delta, the dark pool operated by Chi-X Europe, traded €109.5 million, having averaged €269.5 million over the last three days. The main beneficiary seemed to be Turquoise, the MTF owned by the London Stock Exchange, which traded €307.31 million in its dark mid-point book, compared to a three-day average of €134.1 million, according to the BATS data.
Buy-side worries about information leakage seem to have stemmed from a white paper released by Themis Trading, a US agency broker that specialises in equity trading, entitled ‘Data Theft On Wall Street’, released on 11 May.
The paper noted that high-speed data feeds from US exchanges such as BATS Exchange and Nasdaq OMX can reveal information about hidden order flow, such as buy and sell indicators and cumulative executions of hidden orders. This data, claimed the paper, could be used by high-frequency traders to exploit large institutional orders.
“Most institutional and retail investors have no idea that the private trade information they are entrusting to the market centres is being made public by the exchanges,” read the paper. “The exchanges are not making this clear to their clients, but instead are actively broadcasting the information to [high-frequency traders] in order to court their order flow.”
Yesterday Turquoise issued its own response to the Themis paper, saying that it had taken steps to make its dark pool “safer” and confirming that it does not disclose information about which side of a non-displayed execution is passive or aggressive, or reveal whether the same non-displayed passive order is executed against more than once.
Some sell-side firms have reportedly bypassed BATS Dark and Chi-Delta for all client flow today, while others have chosen to route away from the venues on a client-by-client basis.
One broker confirmed that trading in BATS’ and Chi-X’s dark pools had fallen, attributing it to a “bizarre over-reaction” to the claims made in the Themis white paper. “There’s no proof that anyone is systematically exploiting this data in the US, let alone in Europe,” the broker added.
Chi-X confirmed that it is taking steps to eliminate the dissemination of any data that could be reveal information about order flow executed on its dark pool.
“Market data feeds – not only our own (also Nasdaq OMX, BATS) have provided some very limited post-trade information from launch. This has been standard practice and participants have been aware of it,” Alasdair Haynes, CEO, Chi-X Europe, told theTRADEnews.com. “The world has moved on and as the lit and dark books have got deeper, demands have changed. The Themis report is interesting and in response to market participant reaction we immediately changed the data so that even the very, very limited post-trade data from the dark book has been stopped. This is now sorted and all our clients are aware of this immediate change.”
In addition, BATS Europe sent a message out to its members today stating that from 24 May, order IDs from trades completed in its dark pool would no longer be exposed in either its TCP or Multicast PITCH data feeds.