DARK POOLS / THE FINANCIAL TIMES LEX ( RECOMMENDED READING )

Dark pools

Last updated: April 6 2010 15:37

Their name conjures up a villainous image, but dark pools are ingrained in the markets. Their purpose is to let institutions execute large equity orders over-the-counter without spooking the wider public market. To do so could see the market price run away. A dark pool, then, is merely liquidity that the broader market does not see. And they are here to stay. In fact, NYSE Euronext, the exchange operator, watched its SmartPool system match €1bn of trades last quarter, more than double the prior period.

The US Securities and Exchange Commission estimates dark pools now account for about 8 per cent of stock trades. Their rise owes much to the algorithmic trading used by hedge funds and banks’ trading desks. As their computers now determine significant trading activity, the average order size has fallen. In the past decade, the average trade on the London and New York stock exchanges fell almost 90 per cent to about $12,000 and $6,000 respectively according to Mondo Visione, a consultancy. So it is no surprise that institutions keen to avoid making their large share trades even more conspicuous have revelled in the anonymity offered by dark pools.

Copyright The Financial Times Limited 2010.