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In this shared commentary, Aplomb Strategies writes that when considering a firm’s governance structure, a holistic approach makes the most sense.

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March 15, 2007

Exchanges to Mate With Dark Pools

By Nina Mehta

A handful of exchanges could soon see some of their orders shipped to dark pools in search of price improvement via a new service built by an inter-exchange routing broker.

Order Execution Services, a Princeton, N.J.-based broker-dealer that links exchanges to one another, is launching a service that can intercept orders routed out by its exchange customers and send them to industry crossing systems. There, they could be filled at prices better than the national best bid or offer.

The service, called Dark Gate, was developed as part of the Regulation NMS-compliant smart routing services OES will offer its 150 broker-dealer clients in the second quarter. Those clients can use Dark Gate for orders routed to displayed markets.

Dark Gate can also be used by exchanges routing orders to better-priced quotes at other market centers. Under the Securities and Exchange Commission's Reg NMS, an exchange must send marketable orders to the market center with the best price if executing that order in its own book would trade through the better price.

"If a dark pool is priced better than the NBBO while we're routing an order, we can route to that destination and give the investor a better price," says George Lawlor, a managing director in equities at OES.

Dark Gate will be alerted to better prices in crossing systems by indications of interest sent by those venues. Several dark pools will soon begin sending IOIs to OES for names within their systems, according to Lawlor.

OES is the facility broker-dealer and routing supplier for the Philadelphia Stock Exchange and the ISE Stock Exchange. It also provides outbound routing services for Nasdaq and NYSE Arca. To use Dark Gate, an exchange would require SEC approval, according to OES.

OES would get the same per-share routing fee from exchanges whether it routes to another exchange or to a broker pool. Customers would pay no additional cost for routing to dark pools.