The dark pool marketplace cannot support the rapidly growing number of participants, says Lee Hodgkinson, CEO of Smartpool Trading.

"It's a crowded market place, and not all of the new entrants will survive for a long period of time. There will be attrition and there will be consolidation," he says, speaking as part of a panel discussion at Dealing With Technology’s Best Execution 2009 event, whcih took place yesterday in London. "The key issue is whether any of the new entrants create enough income in a sufficient space of time to stay in business. In these markets that will be very difficult to do," he adds.

Beyond economic pressures, dark pools are facing increased scrutiny from regulators on both sides of the Atlantic amid questions over their transparency. Stephane Loiseau, managing director, head of execution services with Société Générale, says dark pools could take several measures to assuage fears and concerns over their operations. “They should disclose what kind of participants they have as well as provide the break down of those participants by volume,” he says, adding that every firm and entity providing dark pool capabilities should abide by MiFID’s best execution template, explicitly stating operational principles and parameters.

“This is not something being done today and I think it would help reduce the fear people have about dark pools,” Loiseau adds.

Entities with a visible order book need not feel threatened by the growing prevalence of dark pools, says Scott Bradley, head of sales EMEA, electronic client solutions, with JP Morgan: “Dark pools should be considered to be complimentary to displayed liquidity venues and shouldn’t be treated as competition necessarily,” he says. “If you look to utilize dark pool liquidity as part of an efficient and considered approach, then it can really be a powerful tool in your suite of execution products.”

Bats Europe are the latest firm to throw their hats into the dark pool ring, following similar announcements from rival MTFs Turquoise and Chi-X in April and May respectively. Upon its launch, the Bats dark pool will boost the number of off-exchange trading venues in Europe to 13, further increasing competition for liquidity in a market already operating on margins recently described by one participant as “crazily thin.”
--John Beck, UK Reporter for Waters