4 ms·

The best-known purpose (or "intention") of a dark pool is to allow huge buy-side institutional investor to move large blocks of securities. That is the raison

by minimax 12y ago

The best-known purpose (or "intention") of a dark pool is to allow huge buy-side institutional investor to move large blocks of securities. That is the raison d'être for only a couple of dark pools (mostly the older ones like liquidnet). The reason most big i-banks have their own dark pools is because it's cheaper to trade on their own ATS than it is on most of the public exchanges. The "take fee" paid by anyone crossing the spread on the 5 biggest exchanges (by volume) is usually in the range of $0.0025 - $0.0030 per share, which doesn't seem like a huge number, but it can add up when you are trading tens or hundreds of millions of shares daily. If banks can trade customer and internal flow on their own ATS, they don't have to pay those fees. You can look at the average trade sizes broken down by symbol and ATS. The data is here: https://ats.finra.org https://ats.finra.org. The average trade size for most ATSs is somewhere between 100-200 shares. The whole "dark pools are for crossing large blocks" thing is sort of anachronistic these days.

tptacek 12y ago
I was hoping someone would come and provide this additional color. Doesn't this fact reduce the moral implications of dark pools, though?
- minimax 12y ago
  There are a couple of complaints I have seen. 1) That orders that are "pegged" to the NBBO at dark pools may execute at inferior prices relative to the true NBBO. If the market moves from 20.23 x 20.24 to 20.24 x 20.25, you can in theory try to quickly buy in the dark pool at 20.235 and lay off by selling at 20.24 in the lit market. The theoretical per-share profit would be 0.005 before fees and probably zero after. This is the whole point of the IEX 40 (or whatever) miles of fiber in your order entry path. It gives IEX the opportunity to update their view of the NBBO while your order spins around in the coil. I think the issue is partly intrinsic to pegged orders. The pegged order is effectively getting a free ride re pricing based on the the price discovery happening in the lit markets. Maybe that is a natural trade-off? I actually read a really good blog post recently where a guy tried to work out what would happen if more exchanges tried these sorts of delay gimmicks. It's worth a read if you're interested. https://mechanicalmarkets.wordpress.com/2015/03/03/should-iex-become-a-full-exchange-incentives-for-exchanges-to-compete-by-increasing-delays/ https://mechanicalmarkets.wordpress.com/2015/03/03/should-ie... 2) The Barclay's thing where the claim is that Barclay's could prevent you from trading with certain counterparties or types of counterparties but maybe they didn't? It's been in the news but I don't think anything has really been settled. One interesting thing is that the court case is between the NY attorney general and Barclay's, not between Barclay's and any of Barclay's (presumably legally sophisticated and deep pocketed) customers. 3) Unsophisticated or low-cost order routers that sequentially try to trade at various dark pools signal to the market makers who are quoting on those dark pools that someone was potentially trying to sweep. If you think market makers should be able to use this kind of information to avoid being adversely selected against on their other orders, then it probably doesn't bother you, but it bothers people like Michael Lewis. A crappy order router can let out a lot more signal than a good one. It seems like the kind of thing you could A/B test but I don't work on the buy-side so I'm not sure what they do.

by minimax 12y ago

tptacek 12y ago

I was hoping someone would come and provide this additional color. Doesn't this fact reduce the moral implications of dark pools, though?

minimax 12y ago
There are a couple of complaints I have seen. 1) That orders that are "pegged" to the NBBO at dark pools may execute at inferior prices relative to the true NBBO. If the market moves from 20.23 x 20.24 to 20.24 x 20.25, you can in theory try to quickly buy in the dark pool at 20.235 and lay off by selling at 20.24 in the lit market. The theoretical per-share profit would be 0.005 before fees and probably zero after. This is the whole point of the IEX 40 (or whatever) miles of fiber in your order entry path. It gives IEX the opportunity to update their view of the NBBO while your order spins around in the coil. I think the issue is partly intrinsic to pegged orders. The pegged order is effectively getting a free ride re pricing based on the the price discovery happening in the lit markets. Maybe that is a natural trade-off? I actually read a really good blog post recently where a guy tried to work out what would happen if more exchanges tried these sorts of delay gimmicks. It's worth a read if you're interested. https://mechanicalmarkets.wordpress.com/2015/03/03/should-iex-become-a-full-exchange-incentives-for-exchanges-to-compete-by-increasing-delays/ https://mechanicalmarkets.wordpress.com/2015/03/03/should-ie... 2) The Barclay's thing where the claim is that Barclay's could prevent you from trading with certain counterparties or types of counterparties but maybe they didn't? It's been in the news but I don't think anything has really been settled. One interesting thing is that the court case is between the NY attorney general and Barclay's, not between Barclay's and any of Barclay's (presumably legally sophisticated and deep pocketed) customers. 3) Unsophisticated or low-cost order routers that sequentially try to trade at various dark pools signal to the market makers who are quoting on those dark pools that someone was potentially trying to sweep. If you think market makers should be able to use this kind of information to avoid being adversely selected against on their other orders, then it probably doesn't bother you, but it bothers people like Michael Lewis. A crappy order router can let out a lot more signal than a good one. It seems like the kind of thing you could A/B test but I don't work on the buy-side so I'm not sure what they do.