Institutional Investor's Alpha Magazine - April 2009 - (Page 26) Dark Pool Trading “Fragmentation is such a huge challenge for many traders that they want us to route orders to as many of these venues as we can.” Jeff Brown Fidelity Capital Markets Services “If you can get matching speeds down even small amounts, it can lead to large increases in the amounts that you can trade.” The amount of connectivity dark pools have with other venues is another consideration. Brown says Fidelity’s Alternative Trading System (ATS), CrossStream which lets clients tap Fidelity’s retail liquidity and liquidity from its family office, institutional and prime brokerage accounts, among other business also routes orders to as many other dark venues as possible. “Fragmentation is such a huge challenge for many traders that they want us to route orders to as many of these venues as we can. Not all firms have access to so many venues, and we think that gives us an advantage,” Brown says. Dark pools use many different models to set up their crossing networks and determine where else they route orders in the marketplace, if that is their policy. This has inevitably led the buy side to question how “dark” these venues really are, and whether information leaks out to competitors during a trade. Says Barclays’ Fagen, “The focus on dark pools now is In today’s market, dark pool traders carefully consider speed of EXECUTION, amount of CONNECTIVITY and the possibility of information leakage. moving much more toward this dynamic of information trade-off versus liquidity access. How much information do you have to give up given the type of pool you are using in order to get that liquidity?” As Credit Suisse’s Mathisson points out, “The traditional exchanges typically send out indications of interest on their routable orders as they ping different external players, which can cause worries about information leakage. Dark pools traditionally don’t do that, although it depends on their policy. CrossFinder has Shedding Some Light: What Dark Pool Trading Really Means D an Mathisson, managing director of Credit Suisse’s Advanced Execution Services, thinks dark pool trading gets some bad press because of its name. He thinks the term “dark pool” invites the misconception that there’s something sneaky about it. “The name dark pool sounds sort of scary, but it’s a completely legitimate way to trade that’s actually less scary than the reverse, which is broadcasting to the entire world what your trading intentions are,” he says. Buy-side traders don’t want to show their hand for fear of moving the market at the best of times; with the current market volatility, when the Dow can drop or gain over 300 points in a single day, the last thing they want to do when making a trade is to move the price even further. Dark pools or anonymous or undisplayed venues, as some brokers prefer to call them avoid this risk, because neither the price nor the identity of the trading company is displayed. “What a dark pool lets you do is say, ‘I’m willing to buy 1,000 shares of stock, but only if someone else is willing to sell 1,000 shares of stock. I’m not going to tell anyone I’m here,’” says Tim Mahoney, CEO of BIDS Trading, the crossing network for block trades owned by a consortium of broker dealers. When the order is filled, the seller is the only person who is going to know the buyer is there. That means less market impact and better execution. The fact that traders tend to pay less to match trades in dark pools than on exchanges or electronic communication networks is another reason for their popularity. 6 • Alpha Sponsored Report • April 2009
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