May 25, 2011

Agency broker Instinet Inc. announced the launch of a pair of Canadian dark pools aimed at traders who are looking to execute shares in large blocks without moving the market.

The firm, a global operator of dark pools, said the move comes as part of a plan to gain a foothold in the relatively untapped Canadian dark pool market, which had been stifled in the past by tough regulations designed to keep volume on the exchange and favored large banks that match blocks amongst themselves. But with Canadian lawmakers beginning to ease prior restrictions on dark pools, the time to roll out Instinet Canada Cross (ICX) was right, according to Peter Coffey, the segment's managing director.

"The whole dark pool space in Canada is still immature compared to other markets and the market share is quite a bit less because it's a little more restrictive," Coffey says. "But there is some more clarity coming on what we need to do to operate a dark pool there, so we thought now was a good time to enter the market."

ICX is comprised of two block-focused dark pools; Volume Weighted Average Price cross - which has been used in the U.S. for nearly eight years - and BLX, an algo-friendly dark pool designed to aggregate order flow into blocks.

The ICX VWAP cross will lock in and then match orders around the market open every morning, and then have executions priced and printed after the close once the stock's VWAP has been calculated using consolidated market data feeds from Canadian lit markets. "It's simple, you get your orders at 9:15 and then we run a VWAP at 4:10," Coffey explains.

The other dark pool, BLX, looks to build block trades by accumulating orders until a certain volume threshold is reached and then price them at the midpoint. BLX was designed to boost trade size by appealing both to traders using algorithmic strategies and passive block traders, the company says.

The dark pool also features a number of anti-gaming features, including volume triggers and the mid-point pricing window, which is designed to prevent the system from being exploited by information-seeking traders.

"If a stock trades at more than a million shares a day, the threshold for a match is 5,000 shares," Coffey explains. "Dark pools can be gamed by pinging 100 or 200 share orders, but this is obviously virtually impossible when there's a size threshold like in BLX."

Meanwhile Coffey expects demand for the ICX dark pools to be strong since high-quality liquidity is so difficult to find in Canada, which is dominated by illiquid securities such as mining, oil and gas.

Says Coffey: "It's becoming important to have good smart routing and algos that can access various venues and seek out liquidity without leaving a footprint."

As the Senior Editor of Advanced Trading, Justin Grant plays a key role in steering the magazine's coverage of the latest issues affecting the buy-side trading community. Since joining Advanced ...