Plato’s entry into the market comes just as the European Union is changing the rules of the game. Trading in the dark has never been as popular in Europe as in the U.S. Only about 9 percent of European equity volume is traded over unlit venues compared with more than 40 percent in the U.S. EU regulators want to keep it that way. They’ve drafted new regulations, which come into effect in January 2017, requiring all EU trading venues to post pre-trade bid and offer prices and trading volumes—except for those dealing with “large in scale” transactions; such trades (the size of which has yet to be precisely defined) will be exempt. That means if dark pools want to keep the lights off and stay in business, they’ll need to grab market share in big equity orders. Trading such big blocks of stock without tipping off other traders was the reason dark pools were first created, beginning in the 1980s. But over time, that original promise got diluted.
The problem with dark pools in existence today is that regulators don’t trust them, says Paul Squires, the head of trading at Axa Investment Managers. And while institutional investors generally regard dark pools as preferable to lit exchanges, Squires says, they worry that the operators have too much incentive to quietly allow high-frequency-trading firms into the pool. In January, UBS paid $14 million to settle a Securities and Exchange Commission complaint that it secretly created an order type for its dark pool that advantaged high-frequency traders over other customers.
This explains why Axa and Norges have gotten behind Plato, which is also being backed by Deutsche Asset & Wealth Management, Fidelity Worldwide Investment, Union Investment, J.P. Morgan Asset Management, and a group of sell-side banks, including Citigroup, Goldman Sachs, Barclays, and UBS.
The new EU rules will force dark pools operated by sell-side institutions to restructure, open up to more participants, and comply with new regulations. Rather than do so, most brokerages are shuttering their dark pools and instead joining consortia like Plato and multilateral pools such as Turquoise. “It gives us the opportunity to design something progressive from scratch,” Squires says of Plato. He also likes that Plato—unlike existing dark pools—will be operated as a not-for-profit, with any money left over after expenses committed to academic research into market structure. “That is an important signal to regulators and to clients,” he says.
For all the saber rattling, Plato’s relationship with the other dark pools is more “frenemy” than pure foe: The upstart pool is looking for a new company to trade its platform. Among the leading contenders: BATS Chi-X and Turquoise.