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October 14, 2008

Greenwich Offers Traders a Checklist

By James Ramage

Another industry survey is showing that many buyside traders don't know enough about what goes on within the confines of the dark pools they use.

Respondents to a recent Greenwich Associates survey confirmed many of the findings in an earlier one Traders Magazine conducted on what buyside traders know about the use of their order information within dark pools. The Greenwich survey went on to offer pointed questions traders should ask their dark pool providers to better understand their systems.

Greenwich Associates found that two-thirds of participants said their broker-dealers would not say how they estimated the volume inside their pools. Also, more than 35 percent of respondents said the broker-dealers they use to access dark liquidity do not disclose whether their dark liquidity pools are truly anonymous, or whether any information on their orders is shared with other liquidity providers.

For its survey, Greenwich studied 64 institutions in July that consider themselves active dark pool users. About 90 percent of them are based in the U.S.

In June, Traders Magazine learned that 38 percent of 130 respondents to its survey were unaware that some dark pools send out or receive information about resident orders. Nor were they aware that some dark pools send and receive electronic immediate-or-cancel orders from other venues.

John Feng, a consultant at Greenwich, said the degree to which a lot of investors aren't clear about the exact characteristics or features of some of the dark pools they're accessing was somewhat surprising.

"There's been a pretty fast proliferation of dark pools that investors now have access to," he said. "[The lack of clarity] could be a reflection of the time that's required to get used to these different entities."

In response to its findings, Greenwich assembled the following list of questions it recommends buyside traders ask their dark liquidity providers regarding how their pools operate and calculate volume.

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-e.g., 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?

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