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TMX POV - It’s time to rethink Canadian Dark Pools

August 19, 2019

Once viewed with skepticism, Dark trading is a highly viable investment option today providing access to deep pools of liquidity, which represents approximately 10% of Canadian trading volumes with growing adoption around the world. In fact, it has become a regular part of an institutional or retail trader's workflow.

The positive market shift and broader adoption of Dark trading has come about over time as investors have more awareness, understanding and choice.

Where at one time there was simply a single Canadian dark pool, there are now multiple offerings and it is easier to contrast and compare to reach the best possible outcome with a significant amount of low cost liquidity yet to be tapped into.

Although it is still a relatively niche area of trading, the potential benefits of Dark trading are simple and foundational such as access to liquidity, cost reduction and price improvements.

At a high level, Dark trading offers a private financial forum or exchange for trading securities that enable investors to trade with minimal exposure after the trade has been executed with a degree of anonymity. Orders can have a full suite of features, providing optionality in managing dark interactions with effective mechanisms to protect against information leakage and signaling to allow for easy integration into existing dark routing.

Posting dark orders, specifically on TSX and TSXV, facilitate continuous access to orders otherwise seeking interaction with Canada's deepest displayed order book, providing increased fill opportunities.

There is a range of dark strategies available to investors and efficient dark active sweeping strategies that collectively help to achieve the best outcome, including:

  • Least expensive overall first-route options for dark price-improving liquidity vs. other dark markets.
  • Minimum quantity and minimum interaction size features provide participants with control over the environment under which a trade can execute, providing maximum protection from market impact as a result of information leakage.
  • Increased interactions - Resting dark orders benefit from access to natural active order flow already drawn to Canada's deepest pool of visible liquidity.
  • Contra Midpoint Only Plus (CMO+) orders provides an environment for like-minded investors to execute against one another.
  • Transparency - Trades are marked publicly with the "isDark" tag and CMO+ to CMO+ trades are marked with the "is MidOnly" tag.
  • Seek Dark Liquidity® (SDL®) - Option of restricting dark executions to prices that provide price improvement or can allow for executions against dark resting liquidity at-the-quote.

From my perspective, Dark trading has a lot to offer and it's a strategy that many TSX and TSXV clients are leveraging to tap into a discrete pool of liquidity. Earlier this year, it was noted that the average daily Dark trading volume was approximately 80 million*, and the market share for all Dark venues in Canada is approximately 10%*. For TSX DRK in particular, approximately 98%** of traded dark volume resulted in price improvement with approximately 90%** of traded dark volume at the midpoint or better.

*TSX/TSXV listed, YTD 2019
**On TSX S&P Composite, YTD Mar 20, 2019


Photo of Jeff Foster

Jeff Foster

Director, Equity Markets, TMX Markets

Responsible for leading the Equity Markets sales strategy for the trading businesses of Canada’s premier equity exchanges, Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV), including TSX Alpha Exchange, adding more recently, mutual fund sales for the innovative NAVex platform.

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©2019 TSX Inc. All rights reserved. This document is provided for informational purposes only. This document, and certain of the information contained in this document, is TSX Inc.'s proprietary information. Do not disclose, copy, distribute, sell or modify this document or any of its contents without TSX Inc.'s prior written consent. Neither TMX Group Limited nor any of its affiliates represents, warrants or guarantees the completeness or accuracy of the information contained in this document and they are not responsible for any errors or omissions in or your use of, or reliance on, the information. The information in this document is provided with the express condition, to which by making use thereof you expressly consent, that no liability shall be incurred by TMX Group Limited and/or any of its affiliates as a result of any errors or omissions herein or any use or reliance upon the information. The information provided in this document is not an invitation to purchase securities listed on TSX or TSXV. This document does not, nor should it be construed as, providing any trading, legal, accounting, tax, investment, business, financial or other advice, and you should not rely on it for such purposes. Professional advisors should be consulted. This document contains historical information, which may not be indicative of future events. This document also includes forward-looking information (including, but not limited to, the anticipated benefits of Dark trading and other dark strategies), which is subject to risks and uncertainties. All trademarks contained in this document are the property of their respective owners.

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