May 17, 2006

As private crossing networks and related nonquoting sources of liquidity, known as "dark books," vie for market share among block traders, they are creating a highly fragmented market for block trading, according to a new report from TABB Group. Many viable but largely disconnected pools of liquidity are beginning to form in which institutions can disperse and hide order flow, TABB Group notes.

The report, "Locating the Invisible: Aggregating Dark Book Liquidity," explores the market structure of dark books and asserts that the fragmentation and opacity of these venues has made finding and executing block trades increasingly complex and difficult. However, the report says, the buy side is finding solutions for tapping into this hidden liquidity through low-liquidity algorithms and smart order types that can bring together dark pools. Next-generation algorithms more intelligently execute larger blocks of stock at varying sizes, time intervals and locations to maintain the anonymity and preserve the confidentiality of an institution's position, TABB Group points out.

But these tools are not popular with all buy-side traders. There are meaningful objections among the small pool of senior and head traders surveyed by TABB Group for the report. The most commonly cited concern is the potential loss of underlying functionality (64 percent), followed closely by the fear of information leakage (55 percent). <<<