Matthew Smith Reporter

Matthew Smith has been a business and financial journalist for more than a decade. He previously worked with the Financial Times Group, reporting from New York on company buyouts and refinancing in the wake of the Global Financial Crisis. He started his career reporting on the funds management industry in Sydney.

View more articles from Matthew Smith

ETrade deserts dark pool as push for ‘lit’ trades grows

Published 27 March 2013 06:29, Updated 27 March 2013 10:33

+font -font print
ETrade deserts dark pool as push for ‘lit’ trades grows

ASX chief Elmer Funke Kupper says traders benefit from having a single ‘lit’ market that everyone has access to. Photo: Rob Homer

ETrade has walked away from its dark pool experiment as industry participants voice their concerns with online brokerage operators that continue to execute trades via dark pools.

ETrade, which is owned by ANZ, has ceased executing trades through its crossing-engine system – a technology that matches buy and sell orders within the platform’s own customer base away from the publicly disclosed, or so-called “lit” market.

ETrade registered its crossing engine with ASIC in February, but has subsequently abandoned the system because of the scrutiny the practice is attracting from ASIC.

“Given the evolving regulatory landscape, ANZ decided to remove this functionality and this service is no longer available,” an ANZ spokesperson told BRW.

Meanwhile, the securities regulator and industry participants including ASX CEO Elmer Funke Kupper continue to raise concerns over operators that to use dark pools to execute online “retail” brokerage trades.

Dark pools are commonly used by brokerage firms to execute large trades on behalf of institutional clients without alerting the market to the placements. Operators of online brokerage platforms are able to avoid executing trades on the stock exchange by matching orders within their own customer base.

Commonwealth Bank executes its CommSec clients’ trades through a crossing system, believed to be the largest retail dark pool in the Australian market. CBA was contacted but declined the offer to comment on the topic.

It worries me that we end up with a series of clubs.

“At the end of the day there is a benefit in having a single market place that everyone has access to. It worries me that we end up with a series of clubs,” Funke Kupper said during a panel discussion at ASIC’s Annual Forum in Sydney yesterday.

Funke Kupper questioned whether benefits that could be gained by online brokerage customers having their trades executed though a dark pool would actually flow through to the end customer.

“The benefits you get from crossing system are greater for the operator than they are for the investor,” he says.

Impact on retail trades

One concern ASIC has is that online brokerage clients are not getting the best deal possible if their trades are executed through a crossing system, ASIC’s senior executive leader, market and participant supervision, Greg Yanco, recently told BRW.

At the ASIC Annual Forum, deputy chair Belinda Gibson expressed her concern that retail investors don’t understand the value and merit of the way their share market orders are executed.

“Given the sophistication, I’d say a lot of the retail market doesn’t understand what’s happening in a crossing engine – that may not harm them in the long run if they are getting price improvement,” she said.

It is generally accepted that operators of retail brokerage platforms can reduce their transaction fees and therefore the cost of executing trades on their clients’ behalf by matching trades within their own customer base.

Retail trades account for around 11 per cent of all trades executed through dark pools, an increase of four per cent from a year ago, according to ASIC figures; dark pools account for around a quarter of all trades in the market.

Low levels of dark trading are actually beneficial for the integrity of the market, said Carole Comerton-Forde, a professor of finance at the Australian National University. Retail investors should want their trades to be executed in the lit market for best price discovery, she said.

Topics:

Comments