The buy side must figure out where the liquidity is, how to connect to these pools and determine the best strategies to interact with the liquidity.
While lowering execution cost would seem to be at the top of traders' reasons for going dark, lower fees never made it to the first page of customer pitch books. Today, accessing "premium/exclusive" liquidity is what the dark experience is about with brokers promoting their pools as providing "unique" or "premier" access to their most precious asset - their order flow - while disparaging general market access as being equivalent to picking over the dregs at the bottom of the barrel.
Each pool needs a distinguishable niche. To achieve this, brokers are hard at work, toiling over what machinery will make their internal pool a differentiable offering. As a result, these venues are focusing on, securing and branding their flow as premium. Firms are securing not only retail flow, but other flow such as options run off and other differentiated liquidity sources. They are also promoting the cleanliness of their pools, transaction size and access to hosted liquidity providers.
Technology is a second discerning feature as brokers trick out their pools with "the best custom FIX engines and complex event processors." Most of this technology was built internally with little help from outside vendors, providing further proof that brokers are fully vested in ensuring a differentiated environment and a dedication to getting client orders filled.
Linking becomes a third "value-added service" as some pools pride themselves on only connecting to the fastest, most efficient, while others connect to anything that has liquidity. Certain pools boast that they don't preference internal liquidity while others make a point of promoting the preference of their own pool to reduce impact and information leakage.
The way in which liquidity is shared and shopped around is another differentiator. Most pools offer a numerous ways in which their internal pool is more secure or more open than the next, i.e., some promote IOIs, others ban them. While some promote greater access through linkages, others cannot be pinged by the outside and others still ban algorithmic access. Many pools are also developing secretive anti-gaming technology and claim to have "controls" in place to prevent leakage.
The last challenge is to get the message out, especially when everyone is pitching the "mine is better than yours" story, which we constantly hear when collecting data for TABB's LiquidityMatrix. Instead of touting size, most firms are focusing on what makes theirs unique. No matter how large their matching volume, all want to be special and, in some sense, are. The challenge is how to get this message out when 40 or so pools are trying to promote their differentiation, a role played by PR and marketing.
Competition is heating up, the marketing din is tremendous and the way to battle through it is with a strong message set apart from the rest. As trading off the exchanges becomes more popular, only venues with reputations for getting orders done quickly and quietly will survive. And while Darwin may be long gone, his principles are certainly still alive in this increasingly darker and customized dark execution market.