Recently we looked at Systematic Internalizers (“SI’s”) to examine the differences between different types of SI’s. We now turn to Dark Pools to look at some of their key performance criteria and where there might be differences between different types. We categorize Dark Pools into 2 groups: (a) Dark Pools owned by Brokers/Market Makers; (b) Non-Bank Dark Pools, which are largely owned by exchanges and ATS/MTF’s. We look at over 10 million executions since the start of 2020.
- With the exception of Dark Pools explicitly targeted at Blocks (BIDS, TRQM), average execution sizes are similar for Broker/Mkt Maker and Non-Broker Dark Pools. There is, however, a greater probability of getting a larger fill in a Broker/Mkt Maker Dark Pool.
- Spread Capture tends to be higher for Non-Broker Dark Pools at around 50%. Broker/Mkt Maker Dark Pools tend to have lower spread capture as crossing the spread to access liquidity is more common.
- Price Impact is more for Broker / Market Maker Dark Polls, this is especially pronounced for less liquid stocks. With a few exceptions, adverse selection in Non-Broker Dark Pools is also lower compared to Broker/Mkt Maker Dark Pools.
One of the most important metrics in evaluating execution quality is the size of the execution. The larger the execution the sooner the trade can be completed minimizing the risk of the price moving away from you. Examining Figure 1 (below), we see that most of the dark pool venues have similar fill sizes. The Broker/Mkt Maker dark pools appear to have slightly larger average fill sizes, if you exclude two dark pools that are specifically focused on Blocks – BIDS and TRQM.
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By Henry Yegerman, ISS LiquidMetrix