Dark Venues
What is a dark pool?
A dark pool is a non displayed order book where counterparties can send orders (typically larger size) without them being displayed. The majority of executions take place at midpoint.
Why would I use a dark pool?
Dark pools or dark venues, are commonly used in liquidity seeking strategies that are designed to interact with block (larger) trades. If a counterparty has a large order that is likely to cause impact in the lit market its likely they will rest the order in the darks to interact with other block liquidity.
What is the reference price waiver (RPW) ?
The reference price waiver allows dark pools to match an order at the mid-point of the best bid and offer on the primary exchange known as PBBO. In short dark executions take place at the "middle" price between the bid and the offer of the primary exchange.
Key Points
-
Dark volume makes up 10% of trading turnover on venue in Europe
-
Prints above LIS are circa 2.7% of market turnover and 30% of dark trading €1.1bn daily
Page Summary
25%
12%
8%
19%
31%
13%
13%
26%
12%
35%
13%
14%
12%
25%
35%
11%
15%
13%
25%
32%
14%
11%
27%
38%
11%
5%
23%
14%
45%
6%
2017
2018
2019
2020
2021
2022
Market share of dark venues
CBOE
Turquoise
Liquidnet
Virtu Posit
Aquis / UBS
Instinet
Sigma
Conditional Venues
The Venues
TRQM/TQEM
Liquidnet
LIQU/LEUE
Large In Scale Service (BIDS)
LISX/LISZ
Posit
XPOS/XPAL
Virtu
Financial
Turquoise Plato Block Discovery™
N.B. Some dark venues can accept both conditional orders and firm orders
Conditional Venues
How They Work..
Counterparty A leaves a conditional message for 50k shs
Indications of interest (IOI) left in venue
Conditional
Venue
Counterparty A
Subject to the venue firm orders can be left as well as conditional messages
How indications can be left
Blotter sweep from a buyside OMS
Conditional IOIs via a broker algo
Firm orders left in a brokers algo
Counterparty B sends a conditional order of 25k
Firm up requests sent to counterpaties who sent in conditional mesages
Conditional
Venue
Contra order or "aggressive" IOI is placed in the venue
Counterparty B
Counterparty B firms up their order
Counterparty A sends a firm up order back to the venue
Execution!
Counterparty A sends back a firm up for 15k which executes against Counterparty B
Counterparty A
Counterparty B
The value in the conditional order type is that the order does not need to be left on the venue, the counterparty can execute/place orders on other venues. and execute via a conditional for their balance once a firm up message is received
For size priority venues counterparty 1 will receive the first 50k, counterparty 2 will only receive fills if the contra is > 50k
2k
PEG FT
If the venue has price priority the firm order with the most aggressive price receives fills first, in this case counterparty 3 is pegged to far touch.
Counterparty 1
50k
Counterparty 2
25k
25k
Conditional
Venue
Previously in the scenario where multiple counterparties firm up when a contra order enters the venue the volume is pro rated.
All of the four venues listed above now operate on a size priority basis. (CBOE can be price)
Counterparty 3
Conditional Venue Intricacies
CBOE
Large In Scale Service
(LISX/LISZ)
Intricacies
-
MES = LIS
-
A “fill priority” governs the order in which matches of IOIs will result in invitations. Size or price priority can be chosen and is dictated by the aggressive order entering the venue
Turquoise
Plato Block Discovery
(TRQM/TQEM)
Intricacies
-
MES 25% of LIS
-
Orders resting in Turquoise's dark MTF can interact with conditional block liquidity
-
Size priority means block orders are given preference
Virtu
Posit Alert
(XPOS/XPAL)
Intricacies
-
No MES
-
Size priority means block orders are given preference
-
Resting orders left firm have priority over conditional IOIs
-
Indications (conditional orders) can be sent to buyside firms only, who receive desktop alerts
Liqiudnet
(LIQU/LEUE)
Intricacies
-
No MES
-
Blotter Scraper MES >€100k or 5% ADV
-
Size priority means block orders are given preference
-
Firm orders are shown to buyside users as block indications
-
Indications are only sent to buyside users as desktop alerts if the order is firm. Conditional orders do not trigger alerts.
Dark MTF
Turquoise Plato Uncross ™
TRQM/TQEM
Sigma X
SGMX/SGMU
Dark books
CXE and BXE (UK)
DXE(EU)
CHID/BATD/CEUD
Aquis Matching Pool (Formerly XUBS)
AQXD/AQED
Instinet Blockmatch
BLOX
Nordic @ Mid
DNFI/DNSE/DNDK
Swiss @ Mid
XSWM
Dark MTF
How They Work..
Orders are placed onto the venue (non displayed) that rest at midpoint
Dark MTF
Buy order for 50k shares is sent to the venue pegged at midpoint
A new "contra" sell order for 50k shares is sent to the venue
This order is referred to as the "aggressive" order
Buy order resting at MP
Dark MTF
Benefits of dark trading
Orders are not displayed, so are not visible to the wider market
Larger execution sizes than on displayed venues
Pegged to midpoint means you capture half the spread
A match takes place, the buyer and seller receive fills for 50k @ MP
Excecution takes place at MP
In the case of multiple resting orders at midpoint each venue will have specific prioirity rules
Dark MTF
Dark MTF Intricacies
CBOE
Dark Books
(CHID/BATD/CEUD)
Intricacies
-
No MES
-
Orders are sent firm to venue, and will be pegged to midpoint when marketable
-
Priority based on price then size
Turquoise
Plato Uncross ™
(TRQM/TQEM)
Intricacies
-
No MES
-
Only allows the matching of passive orders due to the resting period and random timing nature
-
Size priority matching logic
Goldmans
Sigma X
(SGMX/SGMU)
Intricacies
-
No MES
-
Size priority means block orders are given preference
Aquis
Matching Pool
(AQXD/AQED)
Intricacies
-
No MES
-
Price then time priority
-
Orders larger than LIS will match on a size priority basis
Instinet
Blockmatch
(BLOX)
Intricacies
-
No MES
-
User, Size, time priority
-
Has only one venue listing in the UK
Nasdaq
Nordic @ Mid
(DSTO/DHEL/DCSE)
Intricacies
-
No MES
-
User, Size, time priority
SIX
Swiss @ Mid
(XSWM)
Intricacies
-
No MES
-
Size, time priority
-
Only for Swiss shares
Dark Volume Caps (DVC)
What is it?
Dark volume caps (DVCs) limit the amount of dark trading that can take place for specific instruments and the specific dark venues the instruments trade on.
Are all dark trades limited by the DVC?
No trades above LIS are always permitted in a dark venue. DVCs only prohibit dark trading below LIS.
What are the limits?
A specific instrument cannot trade more than 4% of its volume on a specific dark venue, or 8% of its volume across all dark venues.
Once the limit is breached, what happens?
Dark trading below LIS is suspended at either the venue level or instrument level depending on the level breached for 6 months.
Where does this apply?
The UK abandoned the DVC in March 2021, it still applies across Europe.
See attached for the updated DVC list - https://www.esma.europa.eu/double-volume-cap-mechanism