When ghosts go fishing

First Published in Automated Trader Magazine Issue 13 Q2 2009

Dark pools have been part of the trading experience, on both sides of the pond, since fragmentation began. But do we have a clear idea of how to deal with them? We do now. Helen Sanders emerges from the shadows with news of the latest bright ideas.

God does not play dice with the universe; He plays an ineffable game of his own devising, which might be compared, from the perspective of any of the other players, to being involved in an obscure and complex version of poker in a pitch dark room, with blank cards, for infinite stakes, with a dealer who won’t tell you the rules, and who smiles all the time.

Terry Pratchett, “Good Omens”

Figure 1: Types of Dark Liquidity Pools

Public Crossing Networks. These are “traditional” dark pools formed by agency-only brokerage firms and to which most buy side firms are connected, including POSIT®, LiquidNet and NYFIX Millenium. Most of these cross buy and sell orders (typically at midpoint) but without displaying these buy and sell interests. In addition, some cross trades based on advertisements, such as BLOCKalert, Liquidnet and Pipeline. are some of the most popular advertisement-based pools. An alert usually goes out to the traders (i.e. those with cross-eligible shares on their blotters) but there can be differences between pools.

Internalisation Pools. These pools are established by brokers, initially started by Goldman Sachs (Sigma X) and Credit Suisse (Crossfinder), which therefore include the brokers’ proprietary flow...

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