Dark Pools: The Structure and Future of Off-Exchange Trading and Liquidity (Finance and Capital Markets Series)

238 Pages·2010·3.121 MB·English

by  E. Banks

Dark Pools
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Palgrave Macmillan Finance and Capital Markets Series
For information about other titles in this series please visit the website
http://www.palgrave.com/business/finance and capital markets.asp
Also by Erik Banks:
THE PALGRAVE MACMILLAN DICTIONARY OF FINANCE, INVESTMENT AND BANKING
RISK AND FINANCIAL CATASTROPHE
THE CREDIT RISK OF COMPLEX DERIVATIVES, THIRD EDITION
LIQUIDITY RISK
CORPORATE GOVERNANCE
THE FAILURE OF WALL STREET
WORKING THE STREET
WEATHER RISK MANAGEMENT
ASIA PACIFIC DERIVATIVES MARKETS
EMERGING ASIAN FIXED INCOME MARKETS
THE CREDIT RISK OF FINANCIAL INSTRUMENTS
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Dark Pools
The Structure and Future of
Off-Exchange Trading and Liquidity
ERIK BANKS
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© Erik Banks 2010
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
Saffron House, 6-10 Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The author has asserted his right to be identified as the author of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2010 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN: 978–0–230–23810–7 hardback
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
A catalogue record for this book is available from the British Library.
A catalog record for this book is available from the Library of Congress.
10 9 8 7 6 5 4 3 2 1
19 18 17 16 15 14 13 12 11 10
Printed and bound in Great Britain by
CPI Antony Rowe, Chippenham and Eastbourne
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Contents
List of Illustrations vii
Acknowledgments ix
About the Author x
PART I MARKET STRUCTURE
1 Introduction to Dark Pools 3
2 Market Liquidity and Structure 30
3 Dark Pool Structure 57
PART II MICRO ISSUES
4 Topics in Pricing and Execution 93
5 Trading in Dark Pools 115
6 Aspects of Technology and Architecture 136
PART III ENVIRONMENT OF THE FUTURE
7 Regulation, Control, and Transparency 163
8 The Future of Dark Pools 183
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vi CONTENTS
Appendix 1 Listing of Dark Pool Sites 199
Appendix 2 Listing of MiFID Regulated Markets, Systematic
Internalizers, and Multilateral Trading Facilities 201
Notes 206
Selected Bibliography 213
Glossary 215
Index 225
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Illustrations
FIGURES
1.1 Orders coming into various price points 15
1.2 Sources of dark liquidity 19
2.1 Limit bids and offers 37
2.2 Reserve order execution in Stock XYZ 42
2.3 Hidden order execution in Stock XYZ 43
2.4 Order types 45
2.5 Market structures 52
2.6 Liquidity spectrum 56
3.1 Types of alternative trading systems/multilateral
trading facilities 65
3.2 Key types of crossing networks 74
3.3 Broker/dealer desk model 76
3.4 Examples of dark pool venues and mechanisms 85
4.1(a) Limit order book: Stock XYZ 97
4.1(b) Limit order book: Stock ABC 98
4.2 Supply, demand, and market clearing price 100
4.3 Crossing at best bid offer 104
4.4 Order entry into a crossing network 107
5.1 Implementation shortfall routine 130
6.1 Trade lifecycle 143
6.2 Routing process 148
6.3 The matching flow 153
7.1 Fidessa dark/light trade activity screens 176
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viii ILLUSTRATIONS
TABLES
1.1 Sample U.S. exchange matched market share
performance, August 2009 27
1.2 Sample U.S. off-exchange matched market
share performance, August 2009 28
1.3 Sample European exchange matched market
share performance, August 2009 28
1.4 Sample European off-exchange matched market
share performance, August 2009 28
2.1 Major classes of orders and primary motivations 45
2.2 Stock EFG order book example 1 46
2.3 Stock EFG order book example 2 46
2.4 Stock EFG order book example 1, without illustrating
the dark trade 47
3.1 Major global exchanges with hidden/reserve orders 60
4.1 Stock ABC order book, pre-call 100
4.2 Stock ABC order matching 101
4.3 Stock ABC order book, post-call 101
4.4 Stock ABC, continuous-order market 102
4.5 Top 10 fragmented stocks on the FTSE 100,
August 2009 110
6.1 Share blocks on various dark pools 150
6.2 Order fill against various dark pools 150
6.3(a) FOK buy limit order at $50.00, 1000 shares 158
6.3(b) Dark sell peg order at the midpoint of the NBBO,
2000 shares and minimum quantity 1000 shares,
valid market open tomorrow (T + 1) 159
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Acknowledgments
I would like to extend my thanks and appreciation to Lisa von Fircks at
Palgrave Macmillan for her support in yet another project. Credit is also
due to Renée Takken and the editing, production, and marketing teams at
Palgrave Macmillan for their work in producing the book. Valuable input
was provided by Steve Grob at Fidessa and several referees at Goldman
Sachs, JP Morgan, and NYSE Euronext, and I am grateful to all of them for
helping improve aspects of the book.
And, as always, my biggest thanks to Milena.
EB
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