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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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