Dark Pool Trading

1303 WordsApr 11, 20116 Pages
Introduction Price formation Impact on other market users Possible market abuse INTRODUCTION Turning from the venue of block order trades to a high-frequency trading spot of smaller and medium size orders, dark pools are now being questioned for their initial purpose and if their presence is lowering the market quality. Dark pool trading occurs when the client is submitting an order or a buy without stating his side, nor the size and price of the share. Therefore, he makes an anonymous bit or ask. The pre-trade information opacity leads to easier trading with less liquid stock and moderate prices. In general there are five types of ownership structures of dark pools. (UBB TechWeb, 2011) • Broker-dealers owned dark pools…show more content…
Adverse selection describes the reversed situation. A buyer places an order in a dark pool and an equivalent seller puts a higher ask order. The implication will be that the buy is fully executed and unmatched demand of sell orders leads to depreciation of the share. In this case the buy side was adversely selected (ITG 2008). The issue with adverse selection is that it often remains undetected. The reasons are, that the buy side trader accesses dark pools often indirectly by banks and electronic dark boxes, hence it is difficult to track back the performance of each pool. That the size of dark pool orders are now days very similar (200- 500Shares) to those in displayed markets and orders are traded in a much higher pace. Moreover, brokers may not always willing to provide transparency on their own dark pools. http://advancedtrading.com/algorithms/showArticle.jhtml?articleID=218401501#undefined Understanding and Avoiding Adverse Selection in Dark Pools Investment Technology Group, Inc. (ITG) 5 POSSIBLE MARKET ABUSE Although dark pools claim to prevent information leakage, there is a risk of losing information due to the practices of “fishing” and information-sharing within the own dark pool and liquidity partners. Gaming The term “gamer” occurs when a trader tries to influence orders within the dark pool for his own benefit. This can be achieved by sending a sequence of small orders into a dark pool in order to
Open Document