January 2, 2014

Dark Pool Trade Size Down

By

Phil Albinus

Traders believe dark pools have entered a "mature phase" and use them to avoid "toxic liquidity" from high-frequency trading firms, but the size of trades in those pools is getting smaller. These are among a few findings from a new report published by market research firm Celent.

In the report, "Dark Pools: In the Eye of the Storm," Celent researchers found that traders are adopting a new attitude toward unlit trading venues. While regulators and critics cast a wary eye on dark pools, traders see them as solid and reliable trading systems.

While dark pool adoption may be on the rise, order size is getting smaller both in the U.S. and across the pond. "In the U.S., the average execution size has reduced from 430 shares in 2009 to around 200 shares currently. Increasing algorithmic handling of orders, along with lack of book depth on dark pools are important factors for the reduction in execution sizes. This raises an important question, especially from lit market operators' point of view, whether dark pools are causing liquidity to be hijacked from lit venues, which would adversely affect the functioning of the equity markets," Celent says.

"Dark pools are an important component of market structure," said Muralidhar Dasar, analyst with Celent and main author of the report. "It is important to understand that forcing volumes away from dark pools to lit exchanges may not necessarily result in reduced trading costs and improved market quality."

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