Institutional Investor's Alpha Magazine - April 2009 - (Page 22) Dark Pool Trading Fragmentation “can be a good thing if platforms develop that attract very specific types of liquidity. It makes market participants more comfortable using them.” Doug Rivelli Pragma Financial Systems different venues is also causing a headache. Filling an order of any size can often involve dealing with lots of them at once. Dark pools became so popular in the first place because the growth of different trading venues in the displayed market also meant fragmented liquidity, which made it more difficult to cross trades quietly. Now its huge choice of dark as well as displayed venues lets the buy side call the shots, but liquidity is still elusive. The upside of having so many choices, of course, is that buy-side traders can generate more alpha if they route their orders in a way which gets the best price with the lowest transaction costs and minimal information leakage to competitors. “Whether or not they have five destinations or 40 to choose from, buy-side traders are highly sophisticated,” says Tim Mahoney, CEO of BIDS Trading, a consortium-owned crossing network for block trading. “They have a wide variety of tools, whether it is the aggregators out there or simple fixed connectivity to single destinations, and the analytics which allow them to determine ‘when I go to this destination with this specific order, do I get the best result?’” Traders now have more DARK VENUES to choose from, but LIQUIDITY remains elusive. Doug Rivelli, CEO of Pragma Financial Systems, which has seen client numbers and trading volumes grow even over the last few months, says fragmentation is not necessarily a problem in and of itself. “In our view, it can be a good thing if platforms develop that attract very specific types of liquidity. It makes market participants more comfortable using them, which in turn, adds to the overall liquidity of the market.” As Brian Fagen, Barclays Capital’s co-head of liquid market sales for the Americas, puts it, “Obviously, with the fragmented marketplace that you have between dark liquidity and lit liquidity, there’s no longer any sense that you’re going to be able to find the best price at any one time. But Volume Grows for Broker-Dealer ATSs S ingle-owned brokerdealer ATSs, where clients can tap all the internal liquidity generated by a firm before it reaches the external market, have experienced particularly strong growth over the last year. Cheap, fast and algorithm friendly, they let buy-side traders tap the liquidity relationship they have with their existing brokers and the expertise of sell-side traders in where to route flow. Goldman Sachs’ Sigma X, Credit Suisse’s CrossFinder, Citi Match, and LeveL, which is owned by a consortium of brokers, are among those ATSs that have seen the biggest volume increases. In fact, dark pools owned by brokers and market makers increased their share of dark order volume to 64 percent in December 2008, from 58 percent in April 2008, according to a year-end report on liquidity in the market by Rosenblatt Securities. “We just had a record day on CrossFinder on Feb. 20 and matched 381 million shares,” says Dan Mathisson, managing director of Credit Suisse’s Advanced Execution Services. “Year on year, volumes have grown over five times higher in our dark pool.” Other platforms are also seeing growth. Prior to the Lehman bankruptcy, LX, Lehman’s completely anonymous, continuous crossing system, another registered ATS, was trading more than 100 million shares a day. “Since the acquisition by Barclays Capital, we’ve relaunched Liquidity Cross ( LX) in the US, and we’re marching on our way back toward those numbers,” says Frank Troise, head of equities electronic trading products at Barclays Capital. 2 • Alpha Sponsored Report • April 2009
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