Dark pools
Saturday, May 24th, 2008
Banks allow access to dark liquidity pools
By Anuj Gangahar in New York
Published: May 19 2008 22:05 | Last updated: May 19 2008 22:05
Goldman Sachs, Morgan Stanley and UBS are to link their private stock trading operations to improve liquidity and better compete with the increasing number of alternative exchanges.
The move, to be announced on Tuesday, will give clients of each bank access to the other’s so-called dark liquidity pools – the private interbank or intrabank platforms widely used to trade stocks away from exchanges.
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The pools are used by clients such as hedge funds to buy and sell large blocks of shares in anonymity and without the danger of moving the public price of a stock on an exchange.
The development of dark pools is considered a potential threat to established exchanges. Some analysts suggest the various pool providers could eventually join together, combining their individual ones and then applying for exchange status.
Tuesday’s move stops short of combining the banks’ respective dark pools. “These are access arrangements,” said Will Sterling, managing director of UBS’s electronic trading. “These agreements should offer clients access to additional high-quality liquidity without making their trading process more complex.”
The arrangements, which apply at present only to the US, will allow algorithmic trading orders received by each firm to be processed by three of the largest broker-dealer-operated dark liquidity pools in the US: the Goldman Sachs Sigma X, the Morgan Stanley MS Pool and the UBS PIN Alternative Trading System.
“We’re confident that providing our respective clients access to each other’s liquidity will achieve even better crossing results for our clients in an increasingly fragmented market,” said Greg Tusar, managing director of Goldman Sachs’s electronic trading.
Several other brokers in the US operate dark pools. Mr Tusar said the agreement between the three banks was reached after discussions revealed a vision for their trading businesses’ development.
“This is a natural evolution,” said Andrew Silverman, managing director of Morgan Stanley’s electronic trading. “These arrangements will enable us to work with trusted industry participants to deliver the same level of confidentiality our clients have come to expect.”
Consolidation in the exchange sector in recent years has been driven at least in part by a desire to establish the broadest and deepest pools of public liquidity.
Copyright The Financial Times Limited 2008
http://www.ft.com/cms/s/0/d84dc78a-25d8-11dd-b510-000077b07658.html
GS, MS, UBS Link US Dark Pools
Dealing With Technology (subscription), UK -
NEW YORK-Goldman Sachs, Morgan Stanley and UBS have opened their respective dark pools of liquidity to partnering firms, say officials from the three firms. …
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Banks to link dark liquidity pools |
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Credit Suisse AES Enhances Liquidity Access by Linking to … |
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Credit Suisse Links To RiverCross, Enhances Liquidity Access |
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Goldman Sachs, Morgan Stanley and UBS in dark liquidity pact |
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Goldman, Morgan Stanley, UBS agree to share dark pool access - Update |
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One Big Dark Pool To Rule Them All |
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Wall Street Brokerages Look To Shed Light on Dark Pools |
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Three Major Banks Link Their Dark Pools of Liquidity |
Goldman, UBS and Morgan Stanley in dark pool pact
MarketWatch -
… to interact with the US equity liquidity found in three of the largest broker-dealer operated dark liquidity pools in the US, according to the firms. …
MS
One Big Dark Pool To Rule Them All
Posted by John Carney, May 20, 2008, 9:00am
Goldman Sachs, Morgan Stanley and UBS said this morning that they have agreed to share their “dark pools,” the trading arenas used by institutional investors seeking to trade large blocks of stocks without alerting the broader market about such moves. All of the major investment banks operate dark pools, with Goldman Sachs widely thought to be the industry leader.
Dark pools have been criticized as sapping transparency from the market, perhaps making pricing less efficient and certainly creating more uncertainty about the actual volume of shares trading hands. Large trading orders are broken into smaller pieces and matched to other orders by computers. Traditionally this has been done internally within each individual bank. Under the plan announced today, Goldman, UBS and Morgan Stanley will allow for the secretive trading to take place between their clients. The pools are Goldman’s Sigma X, Morgan Stanley’s MS POOL and UBS’s PIN ATS.
The move threatens to take business away from the public stock exchanges and furthers consolidation in the brokerage industry, as the large investment banks with many clients are obviously best positioned to employ dark pools. Dark pools now account for some 10 percent of equities trading in the United States, and more than 20% of all trades in New York Stock Exchange-listed stocks.
Goldman, UBS and Morgan Stanley agree on dark pools [Reuters]
http://dealbreaker.com/2008/05/one_big_dark_pool_to_rule_them.php
Three Major Banks Link Their Dark Pools of Liquidity
By: Zero Beta Wednesday, May 21, 2008 2:04 AM
Sectors: Finance
Symbols: GS, MS, UBS
Today it was announced that three major banks would link their dark pools of liquidity.
From FT Alphaville,
Goldman Sachs, Morgan Stanley and UBS are to link their private stock trading operations to improve liquidity and better compete with the increasing number of alternative exchanges. The move, to be announced Tuesday, will give clients of each bank access to the others’ so-called dark liquidity pools – the private interbank or intra-bank platforms widely used to trade stocks away from exchanges.
The pools are used by clients such as hedge funds to buy and sell large blocks of shares in complete anonymity and without the danger of moving the public price of a stock on an exchange. The development of dark pools is considered a potential threat to established exchange.
Now I must admit that I am relatively ignorant on the finer points of how these pools work, so any thoughts that I may have should be taken in that context. I have heard that they make up nearly 10% - 20% of trading volume, which is none too shabby.
I understand investment bank’s motives and can not fault them for providing this to their clients. First their is a strategic motive. They used to be paid for their access to public markets, but competition from discount brokers have killed this business. Then they were paid on their research and advice, but the internet and prior “conflicts of interest” have really taken a chunk out of those profits. Up until recently they have always provided capital - but the recent credit crunch and subsequent attempt to trim their balance sheets is hurting their growth in this area. In the meantime, exchanges have flourished as globalization has opened up markets and the growth of hedge funds and technological and financial “innovation” has created more trading and more products. In addition these dark pools are a way for them to get into the business by offering a private alternative. Second, it allows them to offer a “value-added” to their institutional clients. By giving them an anonymous, private form of liquidity, they provide something that many other can not.
While many think there is something sinister about these “dark pools” (with a name like that no wonder), in reality they are no different than the Auction Rate Securities - while they turned out to have problems in the event of a crisis, and I contend still were a form of bid-rigging, they were just a way for firms to please all their clients. Their failure was never planned, obviously, but the credit crunch came along and it was the only option.
The question that has to be asked is more of an ethical or philosophical one. Should these investors HAVE to move the market when the buy or sell a stock? There is an obvious transparency issue. Participants in this market are privy to information that others are not, Time and Sales, or just price and volume. This then implies that participants in the public market are unaware that there are more orders out there than what he or she sees on an order book. Those who have access to both markets have an edge on those who do not, and combined with an average system or strategy should be able to extract profits from those in the public markets. Large volume, in one direction or another is what moves stocks, or any financial instrument. It is how the market discounts effectively.
“Having” to move the market when trading is the subsequent downside of someone who has the size, influence, or ability to influence the market. Not having to move the market, enables someone of size to manipulate the physics of the market to their advantage. This is the main point I wished to make. What follows is an explanation that draws upon ideas in physics and chaos - topics that I am not an expert in. I find it interesting, and think many of you will, but it is by no means a scientific conclusion, support for my main arguement, but rather an investigative hypothesis that sprung from this all.
Benoit Mandelbrot, in his works on chaos, fractals and markets, often talks about the idea of “trading-time”. For an good explanation check out this post on The Econophysics Blog. Basically, the idea is that in markets, time is flexible. During periods of great volatility and volume, time moves much faster, and during periods of relative low volatility and volume time moves much slower. Think of it in terms of your own life. Time seems to go much more slowly when you are at work staring at the clock, than when you are actively doing something. If you believe, as I and many others, in this concept of trading-time, then those with access to both exchanges are able to trade with the benefit of an additional dimension, scale, and are able to distort time and price.
To comprehend such a bold assertion, let’s look at the nature of the two volumes. The makeup of the volume in the dark pools is large orders that the investor wishes not to cause a market impact. These large orders, although they make up a small proportion of the overall volume, make up a large percentage of price movement. To be more exact, this volume, which is made of large orders put in by institutional investors who are viewed by the market as highly sophisticated, skilled, activist, determined to take a company private, and/or in possession of some inside information explain most of the variation in stock prices. Since this volume is made up large share purchases or large share sales, not a large amount of smaller ones, to each individual stock they are more significant and add more to the trend than they do to the noise.
This volume is what I call determined volume. The investors execute the trade with a certain goal or strategy that is known by the market and/or or will fail if the market should move against them. In the time frame of market-time, these investors can see ahead in market-time to some event that will affect price, but since time and price are interrelated, and the trade will alter price, they need a way to alter time and price. When executed on the public exchange, they move the market ahead in price, therefore in time. When done on a private exchange, they do not move the market ahead in price and or time. In essence, they are able to take advantage of price without distorting market-time, while others can not - virtually trading on another dimension than others in the system. They are able to take advantage of scale in order to distort price.
This has important ramifications. If someone has access to both dark pools and public exchanges, there is no incentive for someone with any sort of quantifiable edge, or information to convey any information in the public exchange. There is, however incentive for them to convey false information. If you know a buyout is going to happen, or plan to buy out a company, you could purchase shares in the dark pool, dump them on a public exchange, and then buy them back in the dark pool at a discount. While there are supposedly moves to eliminate this “gaming” of the system, it is detectable only through algorithms that can easily be “gamed” as well. This will create then, a public exchange, where the motive of many trades is not for profit but to speed up or slow down the clock. In essence it will undermine the public markets all together, creating a reality that most could not comprehend. Market participants who access the public exchanges only will be trading with people with access to another exchange where there is greater volume. These dark pools’ scale gives them the ability to alter time, without consequence to price exists. Even if used honestly, not “gaming” the system, every trade that occurs in the system will be one that does not effectively discount information, since any trades that would ordinarily discount the market are done at a discount. Those with information will have an even greater edge over those who do not. Information would discount at a much more accelerated pace in the public exchange, as the lack of these trades, affect the way the same amount of volume will affect time and price. The price to access such an exchange would be substantial.
The two different exchanges causes two different trading-time continuum based on this idea of scaling. In dark pools, where the average trade is 10 million shares, and there are participants seeking out various strategies, a trade of that magnitude becomes common place, and positions that would ordinarily alert the market to “something” means very little. Only the persistence of such trades, or an abnormally large trade would seem out of place. Therefore an observer of such a pool could gain very little relevant information from trades that are very material, and, if they did notice something abnormal would have very little opportunity to go to the public exchange to take advantage of such a thing since by the time abnormality is noticed, it would be too “late”. All liquidity in the dark pool would be gone. They could try the public exchanges, but scaling works both ways. If all large meaningful trades were done in the dark pools, where they appear normal, the public exchanges would be a place where less meaningful smaller trades occur. A trade that once seemed large, would now appear tremendous. It would indicate to the market, just what it actually means - liquidity in the dark pool is dry - and the market would quickly move to reflect that. Discounting would be more violent as well as accurate. Trades could be “worked” over time, but it will take more time to effectively work them, as the market is more sensitive to volume, thus smaller blocks would have to be worked at the expense of time or price. This will all have the effect of quick, large directional moves in the markets as volume from the pools spills over into the public exchanges, instead of dripping in. What will result will be sustained periods of calm and little direction, followed by giant directional moves.
This phenomena plays right into many investors cognitive biases, as they tend to jump into high flyers and sell what isn’t moving. This is similar to what happened in the 1990’s tech boom when investment banks would underwrite crappy tech companies, only let a portion float, then as the stocks popped, float the rest of the shares causing a tremendous amount of volume to be absorbed in a short period of time, and stocks got clobbered. In the case of dark pools, loads of volume can be gathered with very little impact, and once the market in the dark pool is alerted to this will become illiquid, and those who wish to buy more would have to move to the public exchanges. As the public exchanges get woken up, and start catching up in market-time, those who bought the shares in the dark pool would be have a public liquidity pool eager to buy such a stock - its almost a self fulfilling prophecy. This would make sense since those in the dark pool purchase stock in a higher volume exchange, where price and time move differently, and mean different things. When demand spills over, for whatever reason, the force it exerts on price could cause mind-time to catch up to market-time, causing more volume and force. Eventually, there will be a period where there will be ample liquidity and enough momentum, aka volume, in the public exchange to conserve the momentum of a sale of the volume of shares obtained in the dark pool, and the advantage of the dark pool of liquidity will be reaped. While not an expert on physics, I find many similarities to this phenomena and Einsteins theory of Relativity.
Dark pools allow two sets of investors to be subject to two different sets of rules in the market. One set could cause a force that exhibits an equal and opposite force, but at a different time and price, when it works to his advantage rather than disadvantage. It is lack of transparency in the dark pool but also the creation of two separate exchanges with different characteristics that enable this to occur. While I doubt it is intentional, it still favors those with greater information and capital over those without.
http://www.istockanalyst.com/article/viewarticle+articleid_1921789~zoneid_Home.html
Credit Suisse Links To RiverCross, Enhances Liquidity Access
DOW JONES NEWSWIRES
The company said the move will help its clients “to locate liquidity in a fragmented equity market.”
The move comes one day after
Goldman said Tuesday the arrangement would “achieve even better crossing results for our clients in an increasingly fragmented market.”
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(END) Dow Jones Newswires
05-21-08 1246ET Copyright (c) 2008 Dow Jones & Company, Inc.
http://money.cnn.com/news/newsfeeds/articles/djf500/
200805211246DOWJONESDJONLINE000775_FORTUNE5.htm
May 21, 2008 12:13 PM Eastern Daylight Time
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Credit Suisse AES Enhances Liquidity Access by Linking to RiverCross ATS
NEW YORK–(BUSINESS WIRE)–Credit Suisse Advanced Execution Services (AES) today announced that it has linked to the RiverCross ATS. Credit Suisse AES continues to address the buy side and sell side challenge to locate liquidity in a fragmented equity market.
Credit Suisse’s Advanced Execution Services (AES) today announced that it has linked to the RiverCross dark pool as a trading destination for all of its algorithmic and direct access systems. By continuously expanding the network of dark pools Credit Suisse AES helps its clients to locate liquidity in fragmented equity market.
“The fragmentation of the equity markets has produced exponential growth in dark liquidity pools, and this new fragmented market created difficulties for the buy side and sell side to efficiently locate liquidity,” said Dan Mathisson, Managing Director and Head of Advanced Execution Services (AES) “Our goal is to solve market participants’ frustration with fragmentation by creating partnerships that enhance access to liquidity while continuing to provide anonymity.”
“US Equities market structure is more fragmented than ever. In order to maximize the liquidity access and improve execution quality for our clients, AES has been very aggressive about connecting to dark pools,” said Dmitri Galinov, a Director and Head of liquidity Strategy at Credit Suisse AES. “We look forward to partnering with RiverCross to offer our clients a new source of liquidity and reduce market impact.”
“Credit Suisse AES has been a leader in the alternative execution space from the beginning, and continues to deliver innovative technological solutions to the marketplace. We are pleased they have chosen RiverCross as an additional source of liquidity for their customers,” said Paul Onderdonk of RiverCross.
About Credit Suisse
As one of the world’s leading banks, Credit Suisse provides its clients with investment banking, private banking and asset management services worldwide. Credit Suisse offers advisory services, comprehensive solutions and innovative products to companies, institutional clients and high-net-worth private clients globally, as well as retail clients in Switzerland. Credit Suisse is active in over 50 countries and employs approximately 45,000 people. Credit Suisse’s parent company, Credit Suisse Group, is a leading global financial services company headquartered in Zurich. Credit Suisse Group’s registered shares (CSGN) are listed in Switzerland and, in the form of American Depositary Shares (CS), in New York. Further information about Credit Suisse can be found at www.credit-suisse.com.
About AES
Advanced Execution Services® (AES) is Credit Suisse’s award-winning suite of algorithmic trading strategies, tools, and analytics for global trading across equities, options, futures, and foreign exchange. With AES’s tools, traders can work orders on multiple liquidity pools, increase productivity by automating trading and improve execution performance. AES helps more than a thousand institutions and hedge funds reduce market impact, improve performance versus benchmarks, and add consistency to their trading processes. The AES team is dedicated to a philosophy of constant improvement and innovation. The platform has been consistently ranked as the leader in global industry surveys.
About RiverCross
RiverCross is a fully-automated alternative trading system enabling the sell-side to transact block and non-block orders anonymously, and in a high-availability, fault-tolerant and low-latency environment. Started by Susquehanna International Group , LLP, RiverCross leverages the company’s renowned technology and widely-respected trading acumen, while operating as an independent, agency- only ATS.
Contacts
Credit Suisse
Karen Laureano-Rikardsen, +1-212-325-1719
karen.laureano-rikardsen@credit-suisse.com
or
RiverCross Securities
Melissa Stonberg, +1-610-747-1764
melissa.stonberg@sig.com
20 May 2008 - 09:38
Goldman Sachs, Morgan Stanley and UBS in dark liquidity pact
Wall Street banks Goldman Sachs, Morgan Stanley and UBS have agreed a series of bi-lateral agreements that will allow their US clients to access each bank’s dark liquidity pools.
The banks say these arrangements allow algorithmic trading orders received by each firm to interact with the US equity liquidity found in three of the largest broker-dealer operated dark liquidity pools in the US - Goldman Sachs’s Sigma X, the Morgan Stanley MS Pool and UBS’s PIN Alternative Trading System (ATS).
The banks says the move seeks to address the growing complexity of market fragmentation across various non-displayed liquidity venues. But the banks have stopped short of combining their dark pools.
“Our clients are looking for incremental liquidity without having to split each order across many different algorithms,” says Will Sterling, MD of electronic trading at UBS. “These agreements should offer clients access to additional high quality liquidity without making their trading process more complex.”
Greg Tusar, MD of electronic trading at Goldman Sachs, says: “Providing our respective clients access to each other’s liquidity will achieve even better crossing results for our clients in an increasingly fragmented market.”
http://www.finextra.com/fullstory.asp?id=18489
Goldman, Morgan Stanley, UBS agree to share dark pool access - Update |
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| 5/20/2008 11:27 AM ET | |
| Tuesday, Goldman Sachs Group Inc. (GS), Morgan Stanley (MS) and UBS AG (UBS) announced a series of bi-lateral agreements that will allow each firm to offer their clients access to each other’s pool of non-displayed liquidity known as dark pools. The brokerage firms said that through this initiative, they intend to address the growing complexity of market fragmentation across various non-displayed liquidity venues.
Dark pools are secretive electronic trading networks that match buyers and sellers anonymously and conceal trade details from the public. These days, dark pools are becoming popular as big institutional investors are trading blocks of stock in dark pools to reduce market impact and overall transaction costs. Citing Westborough, Massachusetts-based research firm Tabb Group, The Wall Street Journal said that there are currently forty-two dark pool trading networks in the U.S., up from seven dark pools five years ago. Dark pools currently account for around 10% of the equities trading in the U.S., according to the Tabb Group Goldman Sachs’ dark liquidity pool is known as SIGMA X, while Morgan Stanley’s is MS POOL and UBS’ is PIN ATS. These three are the largest broker-dealer operated dark pools in the U.S. Goldman, Morgan Stanley and UBS stated that their deals will allow algorithmic trading orders of each firm to interact with the U.S. equity liquidity found in others’ dark pools. While commenting on the initiative, Greg Tusar, Managing Director, Goldman Sachs Electronic Trading, said, “We’re confident that providing our respective clients access to each other’s liquidity will achieve even better crossing results for our clients in an increasingly fragmented market.” “We value our clients’ confidence in us to provide them with additional liquidity with no information leakage in the handling of their orders,” said Andrew Silverman, Managing Director, Morgan Stanley Electronic Trading. Silverman added, “These arrangements will enable us to work with trusted industry participants to deliver the same level of confidentiality our clients have come to expect from us.” According to Will Sterling, Managing Director, UBS Electronic Trading, the agreements would offer clients access to additional liquidity without making their trading process more complex. GS is trading at $183.04, down $1.36, or 0.74%, on a volume of 1.82 million shares. Shares of Morgan Stanley dropped $1.28, or 2.77%, and is trading at $44.92, on a volume of 3.4 million shares. UBS is trading up by $0.26, or 0.86%, at $30.66, on a volume of 926,668 shares. |
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