Corporate Advisory Insight: Dark Pools
Jared Wasserman from Thomson Reuters’ Corporate Advisory Services group discusses Dark Pools
Transcript:
Dark Pools:
More and more, we hear about trades occurring “upstairs” “off the exchange” or in “dark pools”. While consolidation and advances in technology have changed the traditional exchange trading landscape, and the growth of hedge funds and other alternative asset managers has increased trading volume, investors are ever more utilizing off exchange trading.
I’m Jared Wasserman and today we’re discussing dark pools.
Dark Pools are essentially any pairing of a buyer and seller off a listed-exchange. The dominant players in this market are the large brokerage houses and other institutions that provide electronic trading platforms, with the major exchanges also offering comparable services. Volume in these markets is not reported, nor are the prices or conditions of the trades. Investors have significant incentives to trade in this manner including better pricing, increased anonymity and speed. While there is no guarantee of these advantages, many investors execute trades using an algorithm that searches many pools of liquidity, prior to routing the trade to the NYSE or NASDAQ. In this way, if an opportunity exists, the investor can take advantage of it.
Trading in dark pools is becoming a controversial issue for many including investors, exchanges and regulators. Investors rely upon the liquidity public markets provide and some strategies rely on a record of historical transactions — due to a lack of reporting from these dark pools, this data is unavailable for a portion of trades. Because quantitative and other investors rely on this data, their strategies could be compromised. The exchanges’ competitive advantage centers on its ability to provide liquidity and the best price. Off exchange volume competes with more traditional trading.
Regulators have not made any major changes based on the uptick in trading through these vehicles, although their impact on the public markets could spur action. Reports vary widely on the actual size of the dark pools, from 5 — 20 percent, making their actual impact difficult to estimate. A division of Thomson Reuters is currently holding a summit on Exchanges and Trading where dark pools are being discussed. One of the early takeaways from that summit was that actual volume in dark pools is challenging to ascertain as the process of matching an order may cause it to be counted several times.
Despite the secrecy and lack of data that surrounds these trades, their existence is important for issuers — these trades do affect share prices and share ownership. However, if an investor normally discloses its holdings via SEC filings, it will continue to do so, regardless of how it acquired or disposed of its shares. This means that while an investor may be able to further conceal its activity while it is building or exiting a position, ultimately, the major buy-side firms that own a majority of public company shares will divulge its holdings as they have always done.
I’m Jared Wasserman and this is Corporate Advisory Insight.
Duration : 0:2:58
