Dark pool
From MarketsWiki
A dark pool (or dark pool of liquidity) is a private electronic transaction network, typically maintained by major banks and securities companies, where stocks are bought and sold by clients of those companies. Because the matching of buyer and seller is done entirely within the control of the bank, the bid, offer and sale prices are not published to exchanges (such as the NYSE).
Dark pool operators have the ability to route orders either to an exchange or to their own private network, depending on availability, pricing and client preference.
Dark pools range from completely opaque to semi-transparent, and their order flow can range from transient to stationary. The more transparent the liquidity pool, the easier it is to be manipulated. More-transparent crossing networks, such as Liquidnet, solve this problem by not letting brokers or more-active traders onto the platform and by policing their community and evicting poachers. Other crossing engines with some transparency, such as Pipeline or Posit, give away such limited information that it is difficult to take advantage of. The majority of dark pools, however, tend to be completely dark and either match order flow periodically or continuously as orders flow to traditional exchanges. Markets such as Posit, Instinet or the Nasdaq Cross fit this description.[1]
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Recent Levels of Activity
By mid June of 2009, there was some evidence that venues with high concentrations of retail and high-frequency activity consolidated their hold on the top ranks of dark pools measured by volume. Credit Suisse’s Crossfinder, for example, grew its average daily volume by 10.3 percent, to 147.7 million shares (adjusted to eliminate multiple counting), passing GETCO Execution Services (GES) and Goldman Sachs’s Sigma X to become the country’s biggest dark pool in May.[2]
Pros and Cons of Dark Pools
The companies who provide dark pools gain a double benefit of collecting transaction fees from brokers and shareholders, at the same time not incurring costs by paying exchange transaction costs. Brokers also generally pay lower transaction fees to access dark pools.
Clients of the dark pool companies sometimes favor execution out of the public eye, whether to protect their trading strategies from reverse engineering, or simply to complete their transaction without having their volume create a major price change in the public market.
The established exchanges are beginning to lose substantial transaction volume to dark pools, creating a conflict. While the exchanges are in competition to regain that lost volume, the dark pool operators are still in many cases major clients of the exchange, routing a large volume of non-dark orders to the traditional system.[3]
Some believe that dark pools take away the opportunity to play on a fully level field, in an environment where public participants must have their bids, offers and prices visible to all, yet selected institutional entities may create transactions that are hidden.[4] For example, at a SIFMA conference in May 2009, James Brigagliano, co-acting director of the SEC's Division of Trading and Markets, said dark pools could impair price discovery by drawing valuable order flow away from the public quoting markets.[5]
Dark Pool Operators
Independent Dark Pools
Broker-Dealer-Owned Dark Pools
- BLOCKalert
- CITI markets and banking
- Credit Suisse
- Fidelity Capital Markets Services, CrossStream
- Goldman Sachs Execution and Clearing, Sigma X
References
- ↑ Dark is Hot. But Is It Good?. wallstreetandtech. Retrieved on December 23, 2008.
- ↑ Let There Be Light. Rosenblatt Securities. Retrieved on June 30, 2009.
- ↑ Bourses lose business to the 'dark pool'. International Herald Tribune (Bloomberg). Retrieved on December 11, 2007.
- ↑ The secret stock market. Dow Jones MarketWatch. Retrieved on December 11, 2007.
- ↑ Top SEC Trading Chief Takes Aim at Dark Pools. Traders Magazine. Retrieved on May 20, 2009.
