Dark pools were the order of business for an intriguing panel discussion at TradeTech West today. The discussion, moderated by Douglas Engmann, senior executive vice president and managing director of equities at Fimat USA, touched on dark pool strategies, trends and one panelist even took it so far as to say that displayed markets are not necessary for buy side traders.How did it get that far? The buy sider on the panel, Henry Gray, vice president and head of global equity trading at Santa Monica, Calif.-based Dimensional Fund Advisors, noted that he found it important to be simultaneously in dark pools and public markets.
Dan Mathisson, managing director and head of Credit Suisse's Advanced Execution Services, took that assertion a step further and said for many buy side traders it's not even necessary to be in public venues anymore. "For the buy side the fill rates are higher in the dark," he said, adding that they just don't need to reach out to public markets.
What then will that mean for price discovery? Mathisson contended that price discovering is no longer based on the bid/offer but rather the last trade. "Price discovery has definitely shifted," he said.
Mathisson also said that hidden order types, or dark order in displayed market venues, account for about 25 percent of the volume in the marketplace today. He said these dark order types are becoming increasingly popular and are only going to continue growing in popularity.
When determining which dark liquidity pools to hit Gray said it's important to keep in mind trading goals and know which tiers the dark pools fall into for which kinds of trades. In general he said, "you need to have good partners and understand the order queuing and what venues touch which other dark venues."
Mathisson also discussed the potential for aggregation in the dark pool arena. "It's like finding a needle in a haystack unless you aggregate them," he said, adding that it's possible to spray the top 30 dark pools in less than a tenth of a second thanks to aggregation.
But Gray was not as convinced that consolidation among dark pools is the next step. "You can't get to every private dark pool from every broker," he said. "So it ends up the complexity is now on the buy side desk."
For his trading needs in the mid to small cap area, Gray says exposure to "toxic flow" is not a huge concern and that in general it's just important for him to be as many places as he can without displaying.
The panel did agree that the volatility experienced in August was took trades away from dark pools. "We saw people using dark pools less and less, they didn't want to be passive," said Andrew Brenner, managing director and head of the International Stock Exchange.
Mark Enriquez, managing partner at Pulse Trading, added that when the volatility hit traders didn't have the patience to trade in dark pools. "When they find the market moving they go to ECNs generally," he said.