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January 1, 2007

Darkness Visible

By Nina Mehta

Dark pools can be divided into two groups: broker-owned systems and utilities. Broker systems-both agency and full-service-are owned and operated by some of the largest trading houses on the Street that cater to the buyside. The biggest among them stream their retail and algorithmic flow through the systems on a continuous basis, where that flow can match up with larger resting orders. Utility-type systems are owned by exchanges and broker consortia. They take their members from the sellside, charging them only token fees for executions.

All of these crossing and negotiation systems are anonymous and fully automated. They allow a range of order types, with most permitting customers to set parameters around their executions. Customers can post market and limit orders, and can usually submit discretionary orders and orders pegged to the NBBO midpoint, bid or offer. Most of these systems have user-configurable tools that allow customers to indicate how aggressive or passive they want to be, and to control the timing and size of their executions.

The agency brokers with crossing systems are BNY ConvergEx Group, Instinet, ITG, Liquidnet, NYFIX, Pipeline and River Cross. The full-service brokers that have crossing platforms are Automated Trading Desk, Citigroup, Credit Suisse, Fidelity Brokerage Company, Goldman Sachs, Knight Capital Markets, Lehman Brothers, Merrill Lynch, Morgan Stanley and UBS. The so-called utilities, whose members are sellside firms, are BIDS, ISE Stock Exchange, LeveL, Nasdaq and NYSE.

The following systems cross orders between 9:30 a.m. and 4 p.m., unless otherwise noted. Also, all trades occur within the NBBO, unless otherwise noted. This list does not include opening and closing crosses, after-hours crosses or automated crosses that provide price discovery.