After MiFID II, the heaven is here, for dark market traders

Trading of European stocks on dark markets will probably triple as a result of the MiFID II overhaul, the opposite of what the architects of the law intended, as the new rules give some venues flexibility in how they price shares.
That’s according to Alex Gerko, co-chief executive officer of XTX Markets Ltd., an algorithmic trading firm that’s one of the region’s largest traders. He predicts that dark trading will become as significant in Europe as it is in the U.S., where more than one-third of stock trades happen on dark markets. As much as 10 percent of European equity trading currently takes place on dark pools, including invisible over-the-counter trades.
“This is going to take quite a while: it could take a year, two years,” said Gerko, whose firm said this week it would operate a venue to capture dark trades. “The share of dark trading initially will go down. From that low, every month you will see maybe a 1, 2 percent uptick until it reaches somewhere like 30 percent.”

What will drive the flow is a new type of trading venue that has sprung up in preparation for MiFID’s crackdown on dark pools. They’re called systematic internalizers, or SIs -- platforms run by banks and algorithmic trading firms like XTX, and which Gerko says will account for the bulk of equity trades that move to the dark. SIs are seen winning trades from public venues like stock exchanges because the new rules give them greater flexibility in how they price stocks.

Gerko is not alone in predicting that SIs will cause overall dark trading to increase, rather than decrease under MiFID II. Larry Tabb, the founder of New York research firm Tabb Group, said SIs will be able to offer better prices than stock exchanges because the banks and speed traders that operate them get to choose who they trade with. SIs can also adjust quotes for larger orders depending on who they are trading against, he said.

Dark market is a stocks trading where the price of the stock is revealed after the trading is finished. In other word, the participants betting "on blind" and hoping to win without real knowing about how other traders are pricing the stock.

Source: Bloomberg Pro Terminal

Trader Bozhidar Arabadzhiev

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