Institutional Market Share Grew from 19% in 2012 to 21% of European Notional Turnover in First Six Months of 2013, After Continued Decline since 2009

Dark Order Volumes Rise, Now over 10% for First Time

LONDON & NEW YORK--(BUSINESS WIRE)--The long-only investor has returned to the European equities markets and as a result so has volume of European equities executed in the dark, according to new TABB Group research published today, showing that institutional market share increased nearly 19% in 2012, on the rise in the first six months of 2013 to almost 21% of European notional turnover – this after a continued decline since 2009.

“Firms are turning to dark strategies to limit market impact”

“While the imposition of greater European regulation would appear to be having the desired effect, the reality is that the longer term prognosis, particularly for institutional order execution is bleak,” says Rebecca Healey, a TABB senior analyst in London and author of “European Equity Trends: 2013 State of the Industry.” As a result, institutional traders are increasing the volume of flow they execute in the dark with volumes now in access of 10% in Europe for the first time.

Further European regulation, currently under negotiation in the Markets in Financial Instruments Directive (MiFID) II in trialogue this autumn, in particular legislation concerning dark pool activity, could have even greater consequences, leading to structural changes in investment strategies, as well as implications for execution.

Although institutional investors are returning to European equity markets with the FTSEurofirst 300 Index up over 18% and the IPO market resuming its recovery in the second quarter, Healey says that high-frequency and statistical arbitrage strategies have declined relative to long-only activity, with independent high-frequency trading activity falling to just under 14% in the first half of 2013. “The ability for long-only investors to execute order flow remains severely constrained. Electronic market making is in decline in conjunction with the relative reduction in model-driven flow. We also see that underlying market fundamentals and lack of volatility have further reduced appetite for latency-centric strategies, creating a static market for all but the most liquid of names.”

The impact of depleted margins and bank deleveraging on institutional investors’ ability to trade on risk, combined with the Financial Transaction taxes (FTT) impact on the availability of executable liquidity is reshaping European market structure.

With execution costs being scrutinised and a reduction in block activity, TABB Group believes that further automation is required. “Firms are turning to dark strategies to limit market impact”, Healey says, pointing out that the use of dark multilateral trading facility (MTF) order books has almost doubled since 2011 – the top three dark MTF venues now account for almost 70% of all dark volumes traded – while activity in broker-crossing systems appears to be plateauing. Specifically, she says, Turquoise and BATS Chi-X Europe reached 33% of equity volumes traded in June 2013, versus 44.92% traded on the three major exchanges combined, London Stock Exchange (LSE:L), Euronext (NYX:NYQ) and Deutsche Börse (ETR:DB1).

The report also shows that there’s increasing divergence within the Eurozone. Germany and the UK’s market share are increasing to over 20% versus a continued decline in market share for Italy and France. France’s market share of 21% ahead of the FTT declined to slightly more than 12% in July 2013. Italian equity turnover has dropped from €101bn to just €50bn.

Europe remains at a crossroads, says Healey. “The tide may slowly be turning. Politicians may be losing their stranglehold on financial markets, but regulation remainsthe key factor in any European recovery. Regardless of any positive momentum, we’re still reliant on the final outcome of the latest legislation, in particular MiFID II, due to be completed in trialogue by the end of the year.”

The 29-page report with 18 exhibits can be downloaded by TABB Research Alliance Equity clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For a copy of the Executive Summary or more information, visit www.tabbgroup.com. To purchase the report, write to info@tabbgroup.com.

About TABB Group

With offices in New York and London, TABB is the only research and consulting firm focused exclusively on capital markets, based on the interview-based, “first-person knowledge’ research methodology developed by Larry Tabb. For more information, visit www.tabbgroup.com. In 2010, TABB launched TabbFORUM, the online capital markets community for peer-to-peer opinion and analysis covering current industry issues, tracked daily by 17,000-plus professionals.