Posted on 07/03/2008 1:58:09 AM PDT by TigerLikesRooster
Industry Leaders Frown on Dark Pool Trend
June 6, 2008
By Nina Mehta
Morgan Stanley and Goldman Sachs, bucking a growing trend among the operators of dark pools, are vowing to stay pure. The two bulge-bracket shops tell Traders Magazine they have no intention of broadcasting out information about orders in MS Pool and Sigma X, their respective alternative trading systems. They say that occurs when electronic indications of interest are sent to third-party pools.
"Sending indications out is something that removes the dark aspect of a dark pool," said Andrew Silverman, head of electronic trading distribution at Morgan Stanley. He stressed that MS Pool, the broker's dark pool for single stocks, does not send out indications on orders residing in the pool.
Goldman Sachs follows the same policy for Sigma X, the industry's largest dark pool. "If a dark pool is putting out indications or IOIs, that's very much going into a gray area," said Rishi Nangalia, head of product development at Goldman Sachs Electronic Trading. "We're philosophically against those kinds of linkages."
The positions of these firms contrast with those of some dark pool operators. A handful of dark pools allow customers to choose to send out indications based on orders residing in their pools. The indications are typically sent to the trading engines of other dark pools, market venues or liquidity-providing firms. This is done to increase the chance of finding a match.
NYFIX, JPMorgan and BIDS Trading, for example, give users the option of sending out indications or similar messages. The firms say they specify what their liquidity partners can do with that information, and they monitor or track the resulting interactions. Other brokers send out actual indications to human traders. These include ITG's BLOCKalert and Pulse Trading's BlockCross. BNY ConvergEx's VortEx dark pool enables clients to interact with IOIs from about a dozen venues, while its ConvergEx Cross for block orders now lets buyside firms solicit potential contra-side orders from others in that pool.
Besides Morgan Stanley and Goldman, firms that don't send out indications include Credit Suisse, which operates the market's second-largest dark pool, and UBS. Credit Suisse's CrossFinder pool executed 130 million shares per day in May. Goldman's Sigma X executed 151 million shares per day last month. MS Pool's average daily volume for the month was 45 million.
However, Morgan Stanley is hedging its bets when it comes to the changing dark-pool IOI arena. The broker has now created a new, separate dark pool designed specifically for IOIs, called ATS6. Interested clients will be able, on an opt-in basis, to send out electronic indications based on flow they submit to ATS6.
Silverman calls ATS6 a "gray pool," noting that some clients may choose to use it to reveal some information about their flow with the goal of finding liquidity. Morgan Stanley created the pool to be ready if and when customers decide they want to send out IOIs on their flow. The firm settled on doing this in a separate ATS to avoid uncertainty about what happens with orders in MS Pool, Silverman said. He added that Morgan Stanley isn't sure the new pool will produce enough interest to go live.
Ping!
I thought this would be about swimming pool construction. Oh, well.
EVERY mid to large size Global Investment Company is getting into Dark Pools. The issue here is who's going to take on the risk of processing and reporting the transactions so another subprime mortgage mess isn't created, and how to keep the assets separated from the individual investor so the Government cannot trace assets directly back to their holders for taxation purposes.
BTW, all the Dark Pools currently in existence are setup off-shore, out of reach of the U.S. government to avoid any regulatory repercussions.
Does that mean if they fail we won't have to fix them with tax dollars?
No, that means they have to bribe Congress with twice as much to get the bail out.
And what’s with these tax dodgers? Don’t they “Support Our Troops”?
derivatives ain’t good enough so set up dark pools
Is there an English translation of this article?
These pools are being used for political purposes too (against us) as commodities are being manipulated at this time from these pools.
Me, too. We just bought a blue one. No fancy patterns on the liner. Basic blue.
There is nothing "pure" about such a complete lack of transparency. They're a blow-up in the making, as if the world needs another one.
It seems to me that the point of a pool is to hold water, so you can swim. How do fancy patterns contribute to that?
I wouldn’t have been surprised if dark pools were a trend, like black countertops and appliances. However, my nextdoor neighbors have a pool with a dark gray/black interior, and she told me that last summer, the black surface made the water so warm that it was like a giant hot tub ... not what you want when evening temperatures are in the 90s.
The main selling points are that they are eye-pleasing and they can match theme of your outdoor area or something like that. If you like tiled in-ground pools, you can make your above-ground pool look liket that while you're swimming under water.
Main reason, I think, is to hind the wrinkles in the liner that must better.
I could see black liners being a really, really short fad -- you might have problems telling how far away the side or the bottom was and might find yourself bumping your head if you misjudged.
I hope you enjoy your pool! We have a membership at the pool in a subdivision about a mile away.
LOL...that makes two of us.
It could crash the public markets. Highly regulated communist economies first took down their own economic wealth with stupid policies and those economies were eventually replaced in all practical tense with unregulated black markets.
When a communist economy collapses the communism goes with it. Maybe the same is in store for over-regulated socialist Amerika.
Ya think??
;-)
This does not seem to be the case. Rather, Dark Pools are a mechanism that offers more liquidity to broker-dealers without them having to tip their hand to the market as to who is looking to make a trade. When traders know who is trading, it often gives them the opportunity to profit off someone else's trade based on their knowledge of their trading style and size.
Here is a link; http://en.wikipedia.org/wiki/Dark_pools_of_liquidity
Paranoia can be fun. However, Dark Pools don't appear to have anything to do with most of the comments on this thread; ie - tax evasion, hedge funds, commodity “manipulation” (oh please) or any other nefarious acts. They are just about holding your cards close to your vest so the other players can't see them before you play them.
If anyone has a link to the contrary, please post it.
Thanks.
http://www.wallstreetandtech.com/opinions/larrytabb/showArticle.jhtml?articleID=191801383
Dark Is Hot. But Is It Good?
By Larry Tabb
Wall Street & Technology
8?07, 2006
Dark pools are all the rage. Those opaque matching venues where large blocks meet seem to be on everyone's hit parade. Whether it is Liquidnet’s valuation (which seems to have occurred eons ago), the preponderance of announced sell-side internal crossing engines, the development of dark algorithms, the buy side's desire to participate with hidden flow, or just the loss of NYSE market share causing firms to hunt more judiciously for an execution, dark is hot.
Dark pools range from completely opaque to semi-transparent, and their order flow can range from transient to stationary. Opaqueness impacts fairness, as 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 (these are call markets such as Posit, Instinet or the Nasdaq Cross) or continuously as orders flow to traditional exchanges. ITG’s Posit Now, its continuous crossing network, and NYFIX Millennium leverage this transient matching model.
Brokers’ internal markets, however, tend to work a little differently. To develop active internal markets, brokers need significant amounts of two-sided order flow (buys and sells). Firms obtain this flow in three major ways: leveraging retail flow, hosting liquidity in the dark book and attracting order flow from third parities. All three of these models are now deployed.
UBS has made extensive use of its retail order flow in its internal dark market, PIN. Since retail flow tends to be a bit more two-sided, leveraging retail order flow is a significant advantage in increasing a firm's matching rate and attracting institutional and hedge fund liquidity. Goldman Sachs’ Sigma X platform extends its matching rates by attracting external liquidity providers. The majority of other bulge-bracket brokers are placing larger orders in the matching engine, so as their algorithmic, DMA or traditional flow moves through the crossing engine there are more opportunities to match.
But while dark is hot, is dark good? External crossing networks now execute approximately 5 percent to 8 percent of buy-side flow, while the largest sell-side firms cross approximately 6 percent to 10 percent of their institutional flow. Are we getting to a point where we should be concerned that the dark liquidity pools are beginning to impact the price discovery process of traditional markets?
Certainly the exchanges think so. At the SIA Market Structure Conference a few months ago, Catherine Kinney, president of the NYSE, had a few not-so-nice words to say about crossing - particularly broker internal crossing networks. She posited that dark books impair price discovery, and that every share that is crossed in the dark is a share that doesn't assist the market in determining an accurate price. Now, Ms. Kinney certainly has a vested interest in keeping flow on the exchange, but she isn't completely off base.
At what point should the market be concerned that limited amounts of retail order flow could adversely impact the price of very large blocks? Even if institutions are happy with their price discovery, are we as an industry comfortable with retail flow being matched against sophisticated flow and never making it to the market for all to see?
While all is fair in love and war, and what goes on in a dark room between consenting institutions and hedge funds is fine with me, when it comes to retail fiduciary responsibility, we should act as an industry before the regulators step in and mandate something that everyone will hate. So while dark pools are great for finding liquidity, let's be sure that these dark pools are honest fair, and provide best execution. While I am all for dark pools, it's black eyes I'm against.
Larry Tabb is founder and CEO of Westborough, Mass.-based TABB Group, a financial markets strategic advisory firm. ltabb@tabbgroup.com
http://www.investopedia.com/terms/d/dark_pool_liquidity.asp
Dark Pool Liquidity
A slang term that refers to the trading volume created from institutional orders, which are unavailable to the public. The bulk of dark pool liquidity is represented by block trades facilitated away from the central exchanges.
Also referred to as the “upstairs market.”
The dark pool gets its name because details of these trades are concealed from the public, clouding the transactions like murky water. Some traders that use a strategy based on liquidity feel that dark pool liquidity should be publicized.
However, I think you are reading something into this that isn't there. Here is a link to Fidelity's description of their own dark book: https://www.fidelitycapitalmarkets.com/crossstream.htm
The purpose of these dark books is to hide the INTENTIONS (future tense) of a large institutional investor, who wants to buy or sell a large block of stock, say one million shares. If this transaction were put into the public market place, it would move the price of that stock dramatically, and increase volatility way outside of the normal envelope. It would also create some really bad fills for the institutions involved. As a result, institutions have always traded with each other, away from the exchanges, as much as they could. There is nothing new here
The complaint seems only to come from traders who use liquidity models in their trading methodology. They don't want these trades kept secret! How awful! This is like saying, I don't know how much I should spend fixing up my house unless I can know how much money my neighbor has in his bank account. People who want to know other peoples’ business usually have their own agenda, no matter how much they tout transparency.
People are making comments that these dark pools allow for tax-evasion, commodity manipulation, the hiding of troublesome transactions, etc. This is all nonsense. While the transactions take place away from the exchanges, they must all be reported after the fact by the institutions (pension funds, mutual funds, insurance companies, trust funds, etc) in their required reports to the IRS, SEC, their shareholders, etc.
I see no Enron-like mechanism here to defraud. I think people are simply misunderstanding something with which they are generally unfamiliar.
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