Dark Pools

[aiki14]

In the chatroom today I mentioned that a stocks price movement had the appearance of algorithmic or dark pool trading. Algorithmic trading is just where a set of circumstances prompts a trade, but dark pools are a different thing altogether and most people have never heard of them and most operations that utilize them are wont to use the term (in fact some firms prohibit the term because of the sinister sound).

The price action looks like this, a large transaction noticeably above or below the B/A that acts like a market order moving the price well outside the current spread, but appear out of nowhere even if you're using open view, and then the gap quickly fills back. BQI has had such movements over the last 4 days. I am not saying this is what's happening but the appearance is there.

Dark pools or "nondisplayed liquidity pools" come in 4 types.

They are the independent or agency-owned platforms, which include the likes of Instinet, Liquidnet and ITG's Posit; the broker-dealer internalization engines, such as Goldman Sachs' Sigma X, Credit Suisse's CrossFinder and UBS' PIN; the consortium-owned pools in which many broker-dealers are investing, such as BIDS and LeveL; and the exchange crossing networks that are anonymous and complete matches at set times during the day.

What they do in my context is allow the brokers and block traders to "match up" large positions with smaller positions in a fashion that has less impact on the stock price, and importantly in an anonymous fashion. Eventually on occasion the pools must put the shares into or take shares out of the market to accomplish this (square up the trades) and that's when you see the type of price action I mentioned.

17% of the NYSE Market share was in dark pools this time last year, it is undoubedly more now, heres a chart:

2765

Lots more here, but quite technical:
http://www.advancedtrading.com/crossingnetworks/

My thanks to Cris McEachern for the list.

[microhedge]

Thanks for the post Aiki, and the link, much appreciated. Spent quite a bit of time there.

My concern would be, for someone like me, won't the rapid growth of these dark pools and thus the further fragmenting of the market cause liquidity trouble for those of left in the "open" so to speak?

If these huge brokers and hedge managers are actively seeking out larger and more attractive liquidity for their block trading by increasing these private networks, it seems to me that will hurt the liquidity and thus the volatility we enjoy in the market today?

Am I wrong in that assumption, or too doomsdayish or do you think all will remain balanced with the relative growth of the entire market, private and institutional?

Resembles the IPO situation, the big boys gobble up the large profit margin quickly and quietly while we wait for the scraps that fall from the table... and the scraps become less and less.

Love the name Dark Pools BTW :wink:

[XOM]

Would this not have an adverse affect on short sales? If I understand this correctly the shares in the dark pool are basically off the open market and into a private market? In turn wouldn't the reduction in liquidity eventually create a problem for the dark pools themselves?

[aiki14]

Thanks for the post Aiki, and the link, much appreciated. Spent quite a bit of time there.

My concern would be, for someone like me, won't the rapid growth of these dark pools and thus the further fragmenting of the market cause liquidity trouble for those of left in the "open" so to speak?

If these huge brokers and hedge managers are actively seeking out larger and more attractive liquidity for their block trading by increasing these private networks, it seems to me that will hurt the liquidity and thus the volatility we enjoy in the market today?

Am I wrong in that assumption, or too doomsdayish or do you think all will remain balanced with the relative growth of the entire market, private and institutional?

Resembles the IPO situation, the big boys gobble up the large profit margin quickly and quietly while we wait for the scraps that fall from the table... and the scraps become less and less.

Love the name Dark Pools BTW :wink:

Yes Micro, it makes life more difficult for the little guy. Imagine that huh? There are very few regulatory limits at the moment but that may change in the future. Not because of any concern for us little guys but a desire for transparency by other brokers and agencies.

And the Advanced Trading website is a place where anybody can learn something. I'll bet there are facts hidden away in corners there that even WSE is unaware of.

http://www.advancedtrading.com/

[Jelly]

And the Advanced Trading website is a place where anybody can learn something. I'll bet there are facts hidden away in corners there that even WSE is unaware of.

http://www.advancedtrading.com/

I asked about that last week. I figured it was something like that. It's great to know my worst fears are true. Hahahaha

*I'm only paranoid less than 99% of the time.

[wallstreetsedge]

Yes Micro, it makes life more difficult for the little guy. Imagine that huh? There are very few regulatory limits at the moment but that may change in the future. Not because of any concern for us little guys but a desire for transparency by other brokers and agencies.

And the Advanced Trading website is a place where anybody can learn something. I'll bet there are facts hidden away in corners there that even WSE is unaware of.

http://www.advancedtrading.com/



haha thanks for the mention aiki.. i couldnt stop laughing when i saw my name pop up lol my fiance was looking at me with a strange look

dark pools have been around for quite some time.. big companies, especially clearing firms have been using them for over a decade. im kind of surprised that news on dark pools are just coming to light now... when you think about it, theres nothing really immoral about it. adp and pershing have been using instinets dark pools for the longest...

as for dark pool algorithmic trading.. its been around for some time but there just arent many people who can support it or create a program to support it. i know a lot of investment banks who are still trying to create their own platforms and save money, i believe goldman finished theirs up but its still not as great. not sure if lehman and citi have been using theirs yet but last i heard they were still testing it. in fact.. if youre good at programming, you can get a job at almost any ib that will pay you well over $350k per year to give it just a shot...


a lot of the newer platforms are pretty interesting.. everyones always trying to figure out how others are going to react. i know bac and gs have a platform that simply throw pebbles in to test the water before they enter their real orders.. its a pretty simple concept

all in all, dark pools are just ways for co's to play against each other and i dont see anything wrong with it


i think the best out there right now is instinet but i heard a lot of new programs popped up in the past couple of weeks at trading desks