Understanding of Dark Pools is Elusive, Reports Traders Magazine Survey

The dark pool landscape is changing so rapidly that a large portion of buyside traders can’t keep up with some of the developments.

According to a Traders Magazine electronic survey, 38 percent of buyside traders said they were not aware 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.

Dark pools are now stepping up efforts to cater to different buyside constituencies through their liquidity-seeking efforts. Buyside traders are grappling with what these changes mean for their executions. Forty-two percent of survey respondents said they did not know whether they were sufficiently informed about what some dark pools did with their flow. Another 13 percent admitted they did not know what various pools did with their flow, and 14 percent said they did not want or need to be involved in those decisions.

In comparison, 22 percent said they were sufficiently informed about what dark pools do with their resting orders. And 9 percent said they actively controlled what happened with their order information in dark pools.

Overall, the buyside isn’t opposed to alternative trading systems sending out indications to find contra-side orders. But the range of responses from the buyside community highlights the differing priorities of institutions as well as their uncertain knowledge about how dark pools connect to one another.

When it comes to using dark pools that send out indications to other pools or third parties, the buyside’s chief response is caution. Asked what best reflects their response if a dark pool is able to send out indications based on order flow that resides in that pool, 41 percent said “I will use that pool cautiously under specific circumstances.” A smaller group stressed the importance of finding liquidity. Reflecting 18 percent of the responses, that group said “I will use that pool because it is searching for liquidity in other venues.”

In contrast, 23 percent said “I will not use that pool because of information leakage concerns.” Finally, a full 18 percent of buyside traders acknowledged that “I’m not sure what I think of this.”

The Traders survey was sent to 4,990 buyside traders by email in early June. Over several days, 130 traders answered the survey, yielding a response rate of 2.6 percent. Almost 68 percent of the survey responses came from traditional asset managers, 31 percent from hedge funds, and under 2 percent from pension funds or endowments.

The full results of the survey will be published in the July issue of Traders Magazine.