Rise of dark pools?

Discussion in 'Order Execution' started by rayl, May 6, 2007.

  1. rayl


    A new thread on a topic that's been bothering me lately:

    Any thoughts on ATSes providing non-disclosed liquidity (Millenium, Liquidnet, etc) -- how their increasing use by institutions may impact liquidity availability for smaller orders?

    Will regulation NMS increase their use, as buy side players who want to fill a big order outside the NBBO can do so via a dark pool w/o having to potentially fragment it while meeting NMS requirements on a national exchange?

    Is there anything brokers can/are doing to stay ahead of the growth of dark pools to better support the non-institutional trader's access to liquidity?

    ECNs changed the market slowly but surely over the past several decades (primarily in the last 15 years). Will dark pools be next and if so, how do can retail investors benefit and not be shut out?
  2. At this point, our traders can access these pools via our smart order router and/or the ATS. We clear with Goldman (for those who dont' know us), and this ability has actually been helpful, although not to any extreme at this point, not detrimental in any way that we can determine (to date).

    A lot of these trades that seem to "away from the market" have taken place for years, just posted "As Of" and put in somewhere between that day's stock price range.
    We'll all have to wait and see.

    Things change, we'll have to adapt, but so far no negatives that I have seen.

  3. Reg NMS Implications for liquidity, both displayed and hidden:

    Most flow will go through smart order routers that ping all intermediate price points across many venues.

    Bids will therefore get hit regardless of if they’re displayed or hidden.

    Therefore, hidden orders will massively proliferate in both NYSE and Nasdaq names being placed on cheapest and most liquid venues.

    Visible spreads will widen, ‘real’ spreads will be tighter than ever.

    Less order information will fly around the Street. No one will know who’s been buying, who’s been selling, or how much anyone leaves.

    As signaling is reduced, slippage will decrease on average.

    Volume will increase tremendously.

    (Above reprinted courtesy of Credit Suisse)

    The game will be to be top of book somewhere rather than queued at a venue with a better quote...and if you aren't top of book then you should be hidden. There is no need for the average retail or small prop trader to be worried about missing out on dark liquidity. The new generation of broker algorithms all sweep midpoint and post hidden to the exchanges and ECNs. It will make more sense to execute passively, especially if your broker passes through ECN rebates. If you do need to be aggressive, you will likely get price improvement by going midpoint instead of hitting the bid or lifiting the offer.
  4. rayl


    I think this is the area of my concern. If you're passive, you should be OK, or at least no worse than pre-NMS. (You can still be bypassed by a block that is willing to go inferior to your quote even if top of book if that block crosses a dark on the way out to national and hence not subject to NMS.)

    But if you're active, and because of order size or broker selection, your order doesn't get passed to many of the dark venues, you miss out. So I *am* worried about dark liquidity.

    I wonder if better optimization & disclosure of routing with respect to non-disclosed liquidity venues will become more of a competitive marketing point.

  5. The crossing networks must print between NBBO. Instances where they don't due to latency or routing lag shouldn't have much impact on your day-to-day trading. The latest generation of algos utilize hidden exchange and ECN midpoints as well as the pure dark pools....this is the direction things are going. Even if you only have access to the ECNs, you will get better execution than you have previously, unless you are regularly trading 20k blocks or larger, in which case you should be with a broker that gives you access to the dark networks.
  6. rayl


    Yes, but if your order doesn't see the dark pool, it may not find the liquidity between the NBBO and you may be stuck at the limits of the NBBO.

    I am reminded of the early days of ECNs -- I forget the technicalities (whether it was limit order protection, or consolidating ECN quotes on the consolidated feed, etc), but I recall then that NBBO spreads widened so if you didn't hit the ECNs, you were stuck at the wider spreads! Only subsequent rule making corrected that and narrowed the spreads.
  7. Just my 2c :)
    QuoteTrader sent me to a buy-side conference where dark pools were a main topic.
    Most of the port mgrs said they use dark pools for liquid stocks and exchs/ENCs for thinly traded small caps.
    Rather than impact prop/day-traders' liquidity (on exchs/ecns), my guess is that demand for brokers' traditional trading desks is going to drop (that's why brokers will continue building them, and buy ones they don't already own).
    Yes. NMS requires proof of best execution, so fast, large fills in the bbo should increase demand.
    Yes, buy them :D
    Again, just my 2c, retail/prop/day traders may see liquidity increase, if brokers/exchs buy those dark pools they don't already own, and either link them together and/or to ECNs (increasing liquidty, reducing fragmentation, etc.).

    It's a pretty interesting subject! Thoughts?

    QuoteTrader Product Management
  8. rayl


    In many ways, Brent's thoughts match mine, though I take a more negative interpretation. Quite a bit of liquidity will go dark. A given broker cannot be aligned with or own too many successful dark venues by design [as dark venues don't want to be regulated as ECNs]. If your broker is hooked up with a successful one, relatively speaking, you will see more liquidity.

    But the market overall becomes more fragmented to non-institutionals as large institutional trades can likely ping multiple dark venues whereas retail trades will only ping a smaller subset that is buddy/buddy with the particular broker.

    Just being a little paranoid... (again, recalling the early ECN experience where we saw NASDAQ spreads widen until subsequent regulatory changes fixed things)...
  9. Anyone know for sure WHEN the dark pool trades print to the tape?
  10. Count me in on that question too...

    i am assuming that it is the reg 90 seconds but hoping someone knows more exactly...

    #10     May 10, 2007