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July 1, 2008

Buyside Struggles to Stay Current

Opinions and Knowledge of Dark Pools Mixed

By Nina Mehta

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Buyside traders report that when it comes to dark pools, they're, well, in the dark. They say they aren't sure what dark pools do when they access other pools to try to find liquidity for orders within their own system, according to a recent Traders Magazine survey. Some 38 percent of buyside traders said they weren't even aware that some pools send out or receive either immediate-or-cancel orders or electronic indications of interest from other dark pools.

These revelations come as more alternative trading systems access one another with both firm orders and indications as part of the hunt to find the contra side for orders. This cross-pool liquidity-seeking effort is a growing trend.

Some refer to pools that are willing to send or receive certain order information, typically indications or so-called "liquidity alerts," as "gray pools" rather than dark pools because some information about orders is sent to the trading engines of other pools or venues. ATSs say indications are usually sent with the permission of those placing the orders. In May, dark pools represented 6.3 percent of the industry's average daily volume, according to research firm TABB Group.

However, the trend of dark pools reaching into one another is apparently not buttressed by sufficient education among those using these pools. A full 42 percent of buyside respondents said they didn't know if they were sufficiently informed about what dark pools did with orders they rest in those pools, while 13 percent said they definitely did not know what dark pools do with their flow. Twenty-two percent said they considered themselves sufficiently informed. Another 9 percent said they actively control what happens with their flow. Finally, 14 percent said they did not want or need to get involved in these decisions.

Based on the survey results, buyside traders do not speak with a single voice about what dark pools should and shouldn't do to find liquidity. Indeed, the buyside is conflicted.

Thirty-seven percent said dark pools should send out both indications and IOC orders to scout for liquidity. Those in the opposite camp had an only slightly smaller response rate. Thirty-four percent said dark pools shouldn't send out either indications or IOC orders. Another 15 percent thought dark pools should send out only IOC orders, while 14 percent voted for just indications.

When it comes to receiving versus sending information to other pools, the responses of buysiders revealed a clear bias. Receiving information into a pool was deemed acceptable by most traders. Sixty-five percent of the respondents who answered this question said it was fine for dark pools to receive IOC orders from other pools. The same portion of traders said it was fine to get indications from other pools. Ten percent of the survey respondents did not answer this question, suggesting that they did not like the idea of dark pools forming connections of any kind with other dark pools.

Sending out information about orders was deemed a trickier proposition by these traders. Not quite half the respondents, 48 percent, said it was okay to send out indications, while 54 percent said they were fine with a dark pool sending out IOC orders.

Survey Results I

Survey Results II

Survey Results III