Institutional trading desks are approaching alternative trading systems with more caution and, at times, even skepticism, according to the Greenwich Associates 2015 Trade Desk Optimisation Study. And that’s despite dark pools’ share of total US equity volume holding steady at 14 per cent from 2014 to 2015.
“Traders are less likely to accept at face value the quality of execution they receive from dark pools,” says John Colon (pictured), Managing Director at Greenwich Associates, and author of a new report, What Lies Beneath: A Deep Dive Into US Equity Dark Pool Perceptions.
When asked about the pros and cons of dark pools, year-over-year study participants focused more on the negatives and less on the positives. Thirty-five per cent of responses related to avoiding particular dark pools due to the risk of exposure to “toxic” order flows, up from 23 per cent two years ago. Similarly study participants are less inclined to cite specific dark pools as standing out for delivering price improvement, with positive citations falling from 30 per cent of responses to 17 per cent.
Given that many of recent negative headlines about dark pools centred on impropriety in bulge-bracket dark pools, it makes sense that the bigger banks have suffered the lion’s share of the reputational hit. In terms of dark pools that traders avoid, the bulge-bracket pools were identified 41 per cent of the time as compared with all other ATSs at 30 per cent. The silver lining for these bulge dark pools is that volumes are surprisingly stable, despite the negative press.
Beyond the headlines, the buy-side has taken steps to be more proactive in tracking the quality of liquidity they receive and dark pool operators are sharing more information about their ATSs and offering better controls to the buy side to help alleviate concerns.
“ATS owners understand that although the nature of trading off-exchange is structured purposefully to minimise information leakage about their trades, the will lose order flow if they don’t improve traders’ comfort levels with the trading venue,” Colon says.
