Computerised Trading Survey
15
Of the traditional investors active in dark pools, many cite the presence of HFT in the market as
a significant reason for migrating volume to dark venues. However, some believe the migration
to be driven by an irrational paranoia of avoiding signalling risk, given that HFT strategies are
also active in most dark pools. Many traditional investors make clear that HFT is not wholly
responsible for dark pool use, as proven by the demand for equivalent activities prior to the
advent of HFT. Other traditional investors view dark pools as a key source of liquidity, hence
participation is required to ensure efficient execution of orders.
Traditional investors recognise there are different types of dark pools present in the market;
1. Institutional arenas (e.g. operated by Liquidnet, ITG) – primarily serving non-HFT
institutional investors, enabled by selective membership criteria
2. Technology-driven venues (e.g. operated by Chi-X, BATS and broker hosted venues) –
focused on execution performance (e.g. low latency, co-location provision)
Whilst traditional investors express a preference for using institutional arenas, many remain
active in both types of venue, to avoid restricting sources of potential liquidity.
Most traditional investors active in dark pools are satisfied with the price discovery process.
They believe that any potential issues of price divergence between lit and dark venues would
be best addressed through improvements to post-trade reporting. Whilst many question the
value that HFT strategies bring to dark venues, there is recognition that arbitrage strategies
help ensure pricing efficiency between lit and dark venues.
Dark pools typically have greater venue fees than lit execution venues. However, the cost
benefit of negating adverse price movements often outweighs the additional direct trading cost
(given that explicit costs are typically only 5%-15% of overall execution cots, with the majority
coming from market impact and timing).The specific advantages vary based on the functionality
of each dark pool (e.g. mid-point match vs. a classic dark order book) but the key drawback in
most is the uncertainty of execution. Hence it is the individual requirements of each investor
that determine whether they use a dark pool.
Dark pools are used primarily for the execution of cash equities. The extension to listed
derivatives has been restricted as contracts effectively remain proprietary material of the
issuing venue through their monopoly on clearing. Some traditional investors believe there is
potential for dark pools to extend to OTC derivatives, driven by underlying demand and the
monopoly on clearing will not apply to these contracts.
Those traditional investors using dark venues strongly believe they play a key role in the
equities market, with some suggesting that dark venues merely suffer from a perception
problem by those who do not fully understand how they function and their purpose.
Alternative investors’ perspectives on dark pools
Alternative investors as a whole acknowledge the presence and importance of dark pools as
liquidity providers and as alternative trading venues, though they do not assess them as
uniformly critical to a functional market. Of the alternative investors we met with, none of them
had more than 10% of their total daily volume executed in dark pools. As a result, few of those
we talked to perceived these unlit venues as vital to their business, which is not to say that the
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