Dark Pool Structure

Abstract

The trend toward of-exchange dealing has been accelerating in recent years, thanks to the catalysts we have described in the previous chapters. In this chapter we explore in more detail the general characteristics of dark pools, the mechanisms within established exchanges that create dark liquidity, and the venues that are partly or solely dedicated to fostering dark liquidity. Before embarking on this discussion, let us recall the key mechanisms for pooling or accessing dark liquidity noted in Chapter 1, as these will form the core of our discussion below:

• Exchange reserve/hidden orders and specialist/floor broker books

• Alternative trading systems/multilateral trading facilities, including electronic limit order books and crossing networks

• Broker/dealer proprietary desks

• Agency brokers

We will also consider these efforts in terms of hybrid business structures and briefly review the importance of understanding the profile or character of a dark pool. The main point to bear in mind is that dark pools are quite heterogeneous; each structure and venue operates in a slightly different manner, using different forms of technology and following different kinds of business models in order to service a specific segment (or segments) of the client base. Though common strategies may exist at an overall level, each dark platform is ultimately a unique creation.