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December 8, 2008

2008 Review: Two Dark Pools Pull Away

Turbulent Times

By James Ramage

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Dark pool trading volume made some solid gains in 2008. And two broker-sponsored pools distinguished themselves from the others.

Goldman Sachs' Sigma X and Credit Suisse's CrossFinder began to separate themselves from their dark peers. Their respective volumes broke away from other broker-sponsored pools, particularly those of the more traditional, block-crossing variety-ITG's POSIT, Pipeline and Liquidnet.

"In general, we saw people gravitate to broker-dealer-sponsored dark pools, because Goldman Sachs and Credit Suisse typically have much more order flow than pools like Pipeline and POSIT," said Dmitri Galinov, director of Credit Suisse's electronic trading group, AES. "Folks went to dark pools that are cheap, that are fast and that have very liquid flow behind them."

For the first nine months in 2008, Sigma X and CrossFinder averaged 1.36 percent and 0.91 percent, respectively, of consolidated volume, according to estimates from the consultancy TABB Group. This grew from 0.78 percent and 0.37 percent, respectively, during the same period in 2007.

This year, dark pool vanguards POSIT, Pipeline and Liquidnet averaged just 0.37 percent, 0.20 percent and 0.50 percent, respectively, of consolidated volume over the same period, TABB's 2008 data showed. This shrunk from POSIT's 0.59 percent, Pipeline's 0.35 percent and Liquidnet's 0.64 percent averaged as a percentage of overall volume for the same period in 2007.

Liquidnet wasn't concerned with the numbers, though. The firm chases a different type of order flow than the broker-sponsored pools do, said Jay Biancamano, its global head of marketplace.

"We're a distinctively different beast," he said. "Our negotiation system is designed for block discovery, size discovery."

Both Goldman Sachs and Credit Suisse attributed the increases to their pools' prodigious growth: Orders gravitated to the biggest pools, such as theirs, each said. But they said other factors, including algorithms, helped them achieve that growth.

Goldman Sachs Electronic Trading saw a shift in use toward its liquidity-seeking algorithm, Sonar-and away from VWAP and participation algos-boost its pool volume, said Dave Johnsen, the firm's vice president of business development for Sigma X.

Sigma X also benefited from its diverse order flow, as well as its pacts with UBS and Morgan Stanley. Back in May, GSET, UBS and Morgan Stanley signed an arrangement whereby each firm's algos can access one another's pools.

"Our arrangements with UBS and MS are for reciprocal access, so there's certainly been an inbound benefit, as well," Johnsen said. "They have each been good participants in Sigma X: providing quality liquidity and child block orders."

CrossFinder's volume rocketed to more than 100 million shares a day this past September, from just 15 million shares per day in September, 2007. Like Sigma X, the firms saw benefits from high amount of internalized flow, in this case by Credit Suisse's AES unit.

"As overall volume has grown significantly, people just start using more algorithms," Galinov said. Consequently, because AES generates tremendous flow, it has benefited CrossFinder, he added. In addition, Credit Suisse also invested in improving CrossFinder's speed and consistency, which paid off, he said.

Additionally, the firm noted that a big contributor to CrossFinder's volume boost has been the CrossFinder Retail Network of brokers. Retail flow typically consists of relatively uninformed market orders, which are considered high-quality and attractive to institutions.

So while Sigma X and CrossFinder saw their respective market share of total equities trading climb, the traditional block-trading pools saw theirs fall.