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The threebie that isn't

Published in Automated Trader Magazine Issue 19 Q4 2010

There’s a Rule of Three in dark-pools. One of the three types of counterparty match you meet there could cost you money. But which? Many dark pools and electronic liquidity providers now provide a matching service that allows users to potentially trade at a price that is equal to or better than the price on the primary exchange or corresponding MTF. Whilst this service seems instantly appealing, end users do not always question why somebody would be the counterparty to this trade. Dr Paul Lynch, CEO of Switzerland-based PE Lynch Global AG, takes a look at the desire to meet in the middle and why ending up on the end of the wrong type of mid price match could be to your disadvantage.

The threebie that doesn't even come close to being a freebie. There's a Rule of Three in dark-pools, and if you don't know it, you could be losing money without even realising it. The challenge is: one of the three types of counterparty match you meet there will cost you money. But which is it?

Consider this. Many dark pools and electronic liquidity providers now provide a matching service that allows users potentially to trade at a price that is equal to or better than the price on the primary exchange or corresponding MTF. That's nice of them, isn't it? Maybe too nice. Your immediate reaction may be to grab the 'freebie' before the provider spots his own generosity, but don't you think it might be worth asking why anybody would be prepared to stand as counterparty in such a trade?

Dr Paul Lynch, CEO of the Switzerland-based, PE Lynch Global AG, examines the motivations of some of those nice, generous people you meet in dark pools, questions the widely held desire to meet in the middle, and comes away with some clear reasons why landing up on the end of the wrong type of mid-price match will be to your disadvantage.

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