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Tuesday, October 23, 2007

Dark Pools Menace Wall Street

Dark pools of liquidity threaten Wall Street
Dark pools -- (also Dark pools of liquidity or dark liquidity) are crossing networks that provide liquidity that is not displayed on order books. This is useful for traders who wish to move large numbers of shares without revealing themselves to the open market.

Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges' public limit order books but without showing their hands to others. Dark liquidity pools avoid this risk because neither the price nor the identity of the trading company is displayed.

Major dark pools include those offered by BNY ConvergEx, Citigroup, Credit Suisse, Goldman Sachs, Instinet, ITG, Liquidnet, Morgan Stanley, and NYFIX.


Liz Peek / Oct. 16, 2007 / NY Sun:
'Dark Pools' Threaten Wall Street -- One of the fastest moving trends on Wall Street has flown under the radar of individual investors and, seemingly, the Securities and Exchange Commission: the rapid rise of "dark pools" stock trading arenas.

As the name suggests, dark pools lack transparency: They are used by institutional investors seeking to trade large blocks of stocks without creating the price wobbles that routinely accompany such moves. The trading is done away from the traditional exchanges, offering unprecedented anonymity.

Recently, more than 20% of all trades in New York Stock Exchange-listed stocks have been funneled through these dark pools, up from just 3% to 5% two years ago, according to NYSE figures.

Asked about the SEC's view of dark pools, a spokesman cited a recent speech by the head of the Division of Market Regulation, Erik Sirri, who said that "while the increasing use of hidden orders may be troubling," the SEC believes the new venues are available to all market participants. He suggested that the SEC is not in the position of favoring one market model over another. It would appear that until the trend toward dark pools has a measurable impact on investors, the SEC is willing to be simply an observer. [...]

Cristina McEachern / Oct. 18, 2007/ Advanced Trading:
Growing Dark Pool Trading Volume Could Be Problematic for Exchanges -- As dark pools become a staple routing destination and their overall share of trades in the market continues to climb, how will they continue to evolve, and what does it all mean for the future of traditional exchanges? --

During a panel discussion on dark liquidity at a recent trading event, one panelist made a bold statement: He said that the buy side doesn't need to execute on displayed markets at all anymore, espousing that the future for trading was in dark liquidity and trading effectively without hitting open markets.

While the same panel also noted that dark pools saw a drop in volume during the late-summer market volatility, the theory that trading in dark pools alone could be the future nonetheless piqued significant interest. [...]
Cristina McEachern / Oct. 5, 2007 / Advanced Trading:
STA Panel: Bright Future for Dark Pools -- Finding and tapping liquidity is obviously a vital issue affecting traders across the board and at the Security Traders Association's (STA) 74th Annual Conference in Boca Raton, Florida, it was the focus of a key panel discussion. [...]

As more and more dark pools pop up in the marketplace and talk of aggregation and consolidation continues, Chris Heckman, managing director at ITG, pointed out that traders are now starting to understand the nuances and differences between the pools, which will drive consolidation going forward. [...]

Cristina McEachern / Sept. 26, 2007 / Advanced Trading:
TradeTech West: Dark Pools Rising -- When determining which dark liquidity pools to hit Gray said it�s important to keep in mind trading goals and know which tiers the dark pools fall into for which kinds of trades. In general he said, "you need to have good partners and understand the order queuing and what venues touch which other dark venues."

Mathisson also discussed the potential for aggregation in the dark pool arena. �It�s like finding a needle in a haystack unless you aggregate them,� he said, adding that it�s possible to spray the top 30 dark pools in less than a tenth of a second thanks to aggregation. [...]
David Bogoslaw / Oct. 2, 2007 / Business Week:
Big Traders Dive Into Dark Pools -- The alternative trading systems are luring big institutional customers by offering greater privacy and lower costs. Their growth could affect big exchanges -- It's not easy being a big player in the stock market. Trading huge quantities of stock on traditional exchanges has become ever more challenging, costly, and potentially disruptive. And if other players see your moves, they can disrupt your trades. That's led to the emergence in recent years of alternative trading systems known as dark pools. And their growth could have significant implications for big stock exchanges—and individual investors.

Dark pools sound like something from Greek mythology or a sci-fi epic, but in stock-market speak they are private trading networks that big brokerages such as Lehman Brothers and Merrill Lynch have developed primarily for the internal matching of orders between buyers and sellers who are clients of the same brokers. But dark pools have developed links among Wall Street firms as well, so that orders can be matched across different brokerages. Indeed, some firms are teaming to launch new dark pools such as BIDS Trading. [...]

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