South Africa: Dark Pool Liquidity - a Necessary Evil, or Where the Devil Lurks in the Details?

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The JSE has enhanced its 'hidden' order mechanism to make it easier for fund managers to buy and sell big chunks of shares in off-exchange environments known as dark pools. It is all in the name of liquidity, but the bourse, like many of its counterparts overseas, also wants to limit the opportunity costs lost to such significant trades in an era where official transaction sizes are in decline.

Stock exchanges around the globe are engaged in various high-noon equities shootouts, and the sophisticated trading venues called dark pools are in the line of fire.

Developing an anonymous block trading facility was only one of the JSE's initiatives to attract trade and increase liquidity to South African capital markets, way back in 2010.

Like most other offshore exchanges, the JSE sought to stem the loss of trading income from its public order books to dark pools, mostly run by private banks and brokers. Some of the world's bigger players in this space include JPMorgan Chase, Barclays Capital and Credit Suisse.

Dark pools primarily exist to facilitate off-exchange block trading by institutional investors who do not wish to affect the markets with their large orders and obtain adverse prices for their...

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