| A new research note from the Tabb Group forecasts that MiFID (and Regulation NMS in the USA) will increase the trend for "dark pools" of liquidity to grow as systemic internalisation moves more and more trade volume to central matching and quoting facilities. It also believes that regulators will be forced to prevent too much trade volume moving away from the standard markets.
The report, "Liquidity Management: Pushing Automated Trading beyond Agency Brokerage" (available from the SmartTrade website) anticipates that the amount of trades matched in dark pools will increase as MiFID, and the US best execution ruling, Regulation NMS, make it riskier to execute using traditional internalisation techniques, such as block trading or holding large volumes of the stock.
Dark pools – private crossing and non-quoting sources of liquidity – have been growing as institutions seek to hide and disperse order flow and to reduce their market risk impact. NMS requires that above- and below-market trading requires the sweeping of books, and MiFID requires pricing transparency of internalised products. This will force more brokers to develop centralised dark pools, and also implement liquidity management solutions to better automate, quote and streamline their internalisation / dark pool execution facilities.
The report goes on to say, that "once dark pools become more entrenched, a greater amount of product innovation will begin to occur. Similar to cutting edge algorithmic trading technology just a few years ago, tools for the internal markets will become better understood and improved upon as needs adjust and opportunities arise. Brokers should also have a demand for tools that work with their existing infrastructure as they develop more routing capabilities. This should include more smart routers, complex algorithms and robust FIX engines."
The Tabb Group also believe that regulators will have to intervene to prevent too much order flow from being internalised, or pricing will become less certain and there will be more unknowns regarding the total amount of executions being completed daily. As a result, Tabb Group expects to see a saturation point for the aggregate amount of potential internal order flow.
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