The Financial Times explained that dark pools are off-exchange venues that allow large blocks of shares to be traded anonymously so that a trader’s intentions are not immediately revealed, as they are on an exchange’s public, or “displayed” order book. They are typically used by hedge funds and other “buy-side” market participants such as mutual funds.
According to the news report, the move is the latest sign of the fragmentation of equities trading liquidity as bank broker-dealers, exchanges, and other venues race to take advantage of rules liberalizing European securities trading. This month, the London Stock Exchange agreed on a joint-venture dark pool with Lehman Brothers called Baikal. In addition, Euronext, HSBC, and BNP Paribas will soon launch a dark pool called SmartPool, and London-based Swiss equities platform SWX Europe has linked up with U.S. specialist dark pool operator Nyfix.
“Enabling mutual access will provide both firms with access to additional liquidity in an effort to seek out the best possible execution for their clients,” Credit Suisse and Instinet Europe said in the news report.
In the U.S., in May, the largest broker-dealer dark pools – Goldman Sachs’ Sigma X, Morgan Stanley’s MS Pool, and UBS’s PIN Alternative Trading System – allowed access to each other. In June, Morgan Stanley announced the introduction of NightOwl, a new electronic trading tool that navigates select dark liquidity pools and quoted markets to provide clients with access to the most natural liquidity possible (See Morgan Stanley Provides Access to Liquidity ).