By Simon Jessop
LONDON (Reuters) - The volume of European equity deals in 'dark pools' has hit 10 percent for the first time, a report on Tuesday showed, as long-term investors buck a regulatory drive for greater transparency in the hunt for liquidity.
In a mid-year review of the European stock market, consultants TABB Group said more than one in ten trades in the first half of 2013 were struck using trading venues where, to limit price moves, buyers and sellers transact anonymously without alerting the rest of the market.
TABB said the shift had been driven by regulatory and tax changes that have crimped electronic trading and seen the share of institutional trade rise 19 percent, after falling since 2009.
But such a move runs counter to the regulators' drive for greater market transparency in the region, as they seek to catch up with trading technology and plug supervisory gaps highlighted by the financial crisis.
And the regulatory net is about to tighten further. The Financial Instruments Directive (MiFID) II, currently being debated, specifically addresses the issue of dark pools.
Some countries, such as France and Italy, have also brought in transaction taxes in an effort to deter certain types of trading and raise funds to help pay for the economic impact of the crisis, but the knock-on effects were damaging, TABB said.
"While the imposition of greater European regulation would appear to be having the desired effect, the reality is that the longer-term prognosis, particularly for institutional order execution, is bleak," senior TABB analyst Rebecca Healey said.
"As a result, institutional traders are increasing the volume of flow they execute in the dark with volumes now in excess of 10 percent in Europe for the first time," she added.
The rise in institutional market share in the first half of 2013 meant it now accounted for 21 percent of all notional turnover in Europe, after falling since 2009, TABB said.
The decline in the volume of high-frequency and statistical arbitrage trading, which make money by closing small price dislocations between assets, helping keep the gap between bid and offer tighter, meant it was harder to trade big blocks without impacting the price.
"Firms are turning to dark strategies to limit market impact," Healey said.
(Reporting by Simon Jessop; editing by Sinead Cruise, John Stonestreet)