Sunday, November 22, 2009

Dark Pools

There is an item in the FT looking at possible SEC regulation of Dark Pools. It includes the following:

“Before computerised ‘dark pools’ existed, traders often chose to keep their bids and offers undisplayed . . . by giving a ‘not-held’ order to the floor brokers on the exchange who would then keep sensitive orders ‘in their pocket’,” said Dan Mathisson, head of the advanced execution strategies unit of Credit Suisse, to a US Senate panel in late October. Dark pools migrated from brokers’ shirt pockets to their computer systems by the late 1980s, and some of the largest systems are managed today by Goldman Sachs, Credit Suisse and LiquidNet.

These Dark Pools are increasingly controlled by investment banks and other financial institutions that run virtual market-making that are run by machines and controlled by algorithmic black-boxes. The system can take prices from major exchanges like the NYSE and the LSE and provide some price improvement for customers. The black-box can take positions based on simple mathematical rules and can be over-ruled by operators. The system remains very much dependent on the pricing information provided by major exchanges.

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