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June 18, 2008

It's Gray Out There

By Nina Mehta

Morgan Stanley decided to address the issue of black vs. gray dark pools by starting a separate pool just for indications. Andrew Silverman, head of electronic trading distribution at Morgan Stanley, describes the firm's new ATS as a "gray pool." The pool, known as ATS6, will send out electronic indications about liquidity residing within its walls. ATS6 is built and will go live when there is customer demand for the product.

The big broker created this pool for two reasons, Silverman says. First, the broker didn't want clients wondering about what was happening with large orders they were sending to MS Pool, the firm's dark pool for single stocks. MS Pool is "100 percent black," according to Silverman. "It doesn't IOI or IOC out, and there's no information leakage. It's as standard and plain-vanilla a dark pool as you get."

Morgan Stanley's second reason was to be ready with a clearly delineated electronic IOI product if customers cottoned on to the idea of finding liquidity through dark pool IOIs. ATS6 is therefore a practical hedge for the broker.

"There's a balance between being in a true dark pool, where there's no information leakage, and wanting liquidity," Silverman says. "Some customers are more willing to attract liquidity at the price of some information leakage. For those customers, on an opt-in basis, we'll provide full transparency about what's happening through ATS6." For now at least, when the pool sends out indications it will send out just the symbol, with no side information. Silverman doesn't know how many customers may choose to use the new dark pool.

Some 50 Million

For the last year or two, brokers' dark pools have been differentiated by the types of liquidity they attract, their rule sets and their matching engines. But now, how brokers seek contra-side liquidity is becoming another distinguishing feature.

Agency broker BNY ConvergEx Group, like Morgan Stanley, has pursued a dual dark pool path by creating separate dark pools to accommodate different types of order interaction. But its focus has been on distinguishing between block flow that might require negotiations, through ConvergEx Cross, and smaller streaming flow in VortEx that could match up against incoming IOIs.

The broker's VortEx dark pool takes in high-speed IOIs from 10 to 12 "external liquidity providers," including exchanges, ATSs and electronic market makers, says Craig Viani, managing director in charge of electronic trading product management at BNY ConvergEx. By aggregating close to 50 million IOIs daily, he adds, "we expand the breadth of our liquidity pool without the latency that results from blind pinging."

The liquidity in VortEx, which includes resting customer orders and streaming algorithmic flow, can cross against other customer flow or match up against indications from the external liquidity providers. In the latter case, when there are potential matches, ConvergEx sends IOC orders to those firms, which then execute and print the trade. About a dozen brokers that have dark pools are customers of VortEx, Viani says.