How "Dark" is Your Pool?

August 13, 2008 ( - A new survey from Greenwich Associates reveals that despite the influence they can have on trading outcomes, a meaningful share of broker/dealers and exchanges institutional investors access for dark liquidity have not disclosed important policies and practices.

According to a Greenwich Associates press release, the fact that a broker/dealer or exchange calls its platform a “dark pool” does not make it dark. “Some venues that market themselves as dark pools actually route orders to external destinations, and systems have varying policies related to anonymity and information sharing/leakage,” the release said. Dark liquidity is generally used to try and reduce market impact when trading large orders because it supposedly cannot be seen by any potential market participant and its existence can only be imputed ex post facto.

While a large majority of respondents say broker/dealers and exchanges disclose information allowing clients to determine if their trading platforms are truly “dark,” more than 35% say their broker/ dealers and exchanges do not.

Greenwich Associates also warned that practices differ from system to system in terms of how volume is calculated, what types of orders are accepted, how client orders interact with proprietary orders in terms of priority, and how anti-gaming measures are enforced. Two-thirds of the 64 active users of dark pools surveyed by Greenwich say their broker/dealers and exchanges do not disclose how they calculate volume within the dark pool.

Among the smaller share of respondents saying their broker/dealers and exchanges do disclose this information, nearly two-thirds say matches are double counted, and roughly the same proportion say that orders routed outside of their dark pools to internal or external liquidity providers are counted as part of the dark pool’s overall volume.

Other key findings of the survey, according to the press release, include:

  • More than 35% of respondents say the sell-side broker/dealers and exchanges they use to access dark liquidity do not disclose whether their dark liquidity pools are truly anonymous or whether any information regarding their orders is conveyed to potential liquidity providers.
  • Nearly 20% of dark pool users say their providers have not disclosed the nature of the liquidity offered in the system. “In addition, among respondents whose dark pools offer multiple types of liquidity, more than a third say their dark pools do not explain how customer orders will interact with each type,” says Greenwich Associates consultant John Colon.
  • Almost half of survey respondents say the sell-side broker/dealers and exchanges they tap for dark liquidity do not disclose the types of orders their dark pools will accept or the anti-gaming parameters and controls they have in place with respect to their dark pools.
  • Nearly 45% of respondents say the broker/dealers and exchanges they use for dark liquidity do not disclose how their proprietary order flow interacts with orders placed by the institution and other agency clients.

Greenwich Associates consultant John Feng points out: "In nearly all cases, even if the broker/dealer or exchange does not disclose [dark pool] information up front, they are obligated to provide it upon request."

The firm put together the following list of 10 Questions Every Institution Should Ask Its Dark Pool Providers:

  1. Are you a true dark pool, (i.e., completely anonymous, without any information leakage) or will information regarding my orders be conveyed to potential liquidity providers?
  2. Does your platform route orders out of your dark pool or from any other system connected to your dark pool, including your smart order router, to ECNs, ATSs or any other external source?
  3. If you allow indications of interest (IOIs), is it an opt-in or an opt-out process or will this decision be made for me?
  4. What information regarding my order will be included in an IOI (symbol, side, size, and/or price)?
  5. What type of order flow populates your dark pool (i.e., proprietary orders? retail orders?)?
  6. How do you count matched volume (single or double count) in your dark pool for purposes of what is reported to the tape and advertised, and are orders that are routed out of your dark pool and executed by another party counted toward your own volume?
  7. Do you match within the spread or at the spread?
  8. What anti-gaming controls are in place?
  9. Do you have a minimum size limit?
  10. How will my orders interact with your proprietary orders in terms of priority?