The new European dark pool that could be cap-free


On October 17, Zurich-based SIX Swiss Exchange launched an anonymous trading venue called Swiss@Mid that trades Swiss blue-chip, mid-cap and small-cap stocks.

The new dark pool will be able to trade both large and small transactions by referencing prices from a primary market, in this case the Swiss exchange itself, and completing them at a mid-point price.

Robert Cranston, head of equity product management at SIX Swiss Exchange, said the new venue had completed 43 executions, valued at more than Sfr504,000 during its first day of trading.

Dark pools conceal bids and offers before transactions take place, and the amount of trading on the venues has hit record levels in European stocks this year, reaching 9.2% of overall value traded in August, according to the latest available analysis undertaken by US broker Rosenblatt Securities.

But European regulators want to ensure lit markets remain centres of price formation and limit the growth of dark pools, particularly those that reference prices from primary markets. The EU’s revised Markets in Financial Instruments Directive, which is known as Mifid II and will come into force in 2018, will limit the proportion of trading that takes place in dark pools that reference prices from other markets.

However, Switzerland will not implement Mifid II because it is not part of the EU and is instead bringing in a new national rulebook called the Financial Market Infrastructure Act, or FinfraG, which does not include caps on dark pools.

If FinfraG is deemed equivalent to Mifid II by the European Commission, which would allow firms in the EU to trade on Swiss@Mid, it would give the venue a potential advantage over EU-based dark pools that trade Swiss stocks.

Those include – for now at least, depending on how the Brexit talks unfold – London-based venues such as those operated by Bats Europe, Turquoise and brokers such as UBS, Goldman Sachs and ITG – will all be subject to the caps.

SIX’s Cranston said that “based on the current information on equivalence, we feel we are equivalent”.

However, Cranston said the dark pool had not been designed with this in mind but rather to “improve our offering to members, and give them a lot of flexibility and options for different types of trading going forward”.

He added the venue was also seeking to be highly transparent and added it was “actively working with liquidity providers in the pool and enforcing obligations on them during a trial phase”. Several dark pools in the US have faced regulatory action for not disclosing the nature of their interactions with such firms.

The other potential advantage the Swiss venue has over London-based pools lies in limiting the ability of high-speed traders from taking advantage of a stale reference price. As many London-based dark pools trading Swiss stocks use reference prices from the exchange in Zurich, some trading firms may receive that reference price faster than the dark pool can and could act on it ahead of others. The UK’s Financial Conduct Authority published a study on September 15 that found that UK dark pools references stale price around 3.5% of the time.

Cranston said: “Because it is being wrapped into our lit book, there is absolutely no opportunity for someone to take advantage when the lit book price moves.”

He added the book includes a sweep order functionality, which allows orders to be sent to the dark pool first, with any unfilled amount then immediately routed to the main market.

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