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A Shot in the Dark

Nice to see that BATS Europe has announced that it, too, is going to launch a dark pool service. While not too surprising, it is interesting to note that they will be offering a maker taker pricing model as this will be sure to extend the current price war into the dark arena as well.

BATS joins a long list including Chi-X, Turquoise, NYFIX Euro Millennium, SmartPool, Pipeline, NEURO Dark and, of course, Baikal, that will all offer traders different destinations for their dark order flow. If you add to this the pools operated by the major banks such as Goldman Sachs, Credit Suisse, UBS and Bank of America Merrill Lynch, then the choice becomes truly bewildering.

In the headlong rush to launch these initiatives I wonder whether the firms in question have stopped to consider how the trading community really wants to use this type of facility. The issue seems to be complicated by the fact that the term “dark pool” is being used to describe an ever-widening array of platforms and activities that stretch the original concept (a block crossing facility that minimises information leakage) almost completely out of shape. This point seems to have been picked up by the regulators, too, as both the SEC and the FSA are concerned about their collective impact on investor protection and market transparency.

In any event, trading firms will need to find new ways to navigate intelligently across all these pools and seek the most appropriate liquidity in each. This will inevitably require further technology investment for those firms that wish to maintain complete control over where they route their order flow to. This is where the offerings from Baikal and Turquoise have a potential advantage as they are providing a Liquidity Aggregation Service which is similar in concept to the “compare the market” style insurance web sites that we hear so much about. Baikal and Turquoise are also good examples of how the trading landscape is reshaping itself. The traditional clear-cut distinctions between buy-side, sell-side and exchanges are increasingly being replaced by more murky concepts such as senders of flow, routers of flow and end destinations. In some cases, participants are acting in multiple categories and so the distinction between brokers and venues is becoming increasingly blurred.

On a different note, I was invited by the folks at Carnegie to participate at an event last week that examined fragmentation in the Nordic region. The ensuing debate between OMX and Burgundy was respectful but highlighted the different propositions of the traditional exchanges versus new, lower cost MTFs. It was also interesting to meet many of Carnegie’s customers and discuss the impact of fragmentation on their stock at first hand. Many thanks to John Lauritsen and his team for their professionalism and hospitality in staging a very thought-provoking event.

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