Dark Pools 2008 In Review by ccsicsko

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Rosenblatt Securities speaks to the trends in dark pool liquidity with the expectation of what is to come in 2009.

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									Dark Pool Trends: 2008 in Review
A Year of Growth and Transformation

January 29, 2009

Joe Gawronski Justin Schack Rosenblatt Securities Inc.

Dark Pools: 2008 in Review
The Top 8 of ’08: Trends That Shaped the Dark-Pool Landscape
1.  Impressive Volume Growth
•  Driven by new venues, internalization and buy-side demand Despite pundit predictions ECN comparison flawed Not inherently evil, but can degrade execution quality and thus require disclosure, monitoring and opt-out Exchange routing/solicitation to and from dark pools


5. Algo-Friendly Pools Dominated
•  •  Fundamentally transformed space Response to losing market share to fast, cheap, small-size pools run by brokers and market-makers Addressing buy-side frustration over declining average trade size in nondisplayed venues Likely to accelerate in 2009 Capitalizing on MiFID rules that open incumbent exchanges to competition for first time

6.  Block Venues Court Algo Flow

2.  No Consolidation of Pools
•  •  • 

3.  IOIs and Other Linkages Exploded

8.  Algo-Friendly Pools Pursued Blocks
•  •  • 

4.  Dark and Light Joined Forces

10. Dark Pools Invaded Europe

Dark Pools: 2008 in Review
Impressive Volume Growth in 2008
10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC


Dark Pools as % of Consolidated Volume

Dark Pools: 2008 in Review


Why Consolidation of Dark Pools Didn’t Occur, and Likely Won’t
• Flawed Comparison With ECNs in late 1990s/early 2000s • Category dominated by broker internalization pools that have no incentive to combine • Independent pools charge relatively high commissions and not subject to margin pressure that drove ECN consolidation • A few weak pools may go out of business or sell, but we won’t see ECN-like winnowing through M&A

Dark Pools: 2008 in Review
Use of IOIs and Other Linkages Exploded, in Part to Address Fragmentation
• IOIs and IOCs
• Outbound IOIs — solicit flow into dark pools • Inbound IOIs — alert pools to external matches • IOCs — used to respond to inbound IOIs


• Dark Pool Aggregators • Problems: latency, adverse selection, restriction from “juiciest” flow • Linkages and Reciprocal Algo Access
• Goldman-Morgan Stanley-UBS • Credit Suisse-Instinet

Dark Pools: 2008 in Review
Dark and Light Markets Joined Forces
• NYSE Arca, Nasdaq and BATS — dark routing/solicitation programs • Follows on success of Direct Edge ELP program • Helps dark pools broaden reach to increase match rates • Allows exchanges to cut costs
• Routing unmatched orders to other exchanges/ECNs = 30 mil fee • Routing unmatched orders to certain dark pools = free/de minimis charge


Dark Pools: 2008 in Review
Broker/Market-Maker and Exchange Pools Gained Market Share at the Expense of Independent/Agency Pools
1000 900 800 700 600 500 400 300 200 100 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT Consortium NOV DEC


Average Daily Volume, Millions of Shares




Dark Pools: 2008 in Review
Change in Share of Dark Pool Volume by Category
Consortium 8% Consortium 7%


Independent/ Agency 24% Broker/ MarketMaker 58% Exchange 10% Consortium 8%

Independent/ Agency 14%

Exchange 15% Independent/ Agency 18%

Broker/ Market-Maker 64%

Exchange 11%

Broker/MarketMaker 63%



Dark Pools: 2008 in Review
Growth of Individual Pools: Algo-Friendly Venues Dominate


Dark Pools: 2008 in Review
Convergence of Block Crossing and Algo-Friendly Approaches: A 2008 Trend That Will Be Even Bigger in 2009
• Block Pools Courting Algo Flow
• Response to stagnating block volumes/losing share to algo-friendly pools • Liquidnet H2O/Supernatural • Pipeline Algorithm Switching Engine


• Algo-Friendly Pools Courting Blocks
• Response to buy-side frustration with declining size in dark pools • Goldman point-in-time cross, Block Signal product • LeveL block order type planned; Instinet block pool forthcoming • New York Block Exchange • Joint venture of BIDS and NYSE Euronext — launched 1/29/09 • Integrates block orders with public and reserve books on NYSE

Dark Pools: 2008 in Review
Convergence in Action: As Dark Pool Landscape Transformed, Volatility Had Less Effect on Volumes, But Extreme Levels Still A Drag
70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%


Dark Pools as % of Consolidated Volume

VIX Average Close

Dark Pools: 2008 in Review
Dark Pools Invaded Europe
• EU’s MiFID opens incumbent exchanges to competition • Some pools in Europe for many years • Liquidnet, Posit • Wave of 2008/pending 2009 launches to capitalize on MiFID
• NYFIX Euro Millennium • Knight Link • ICAP BlockCross • Incumbents and challengers alike recognize power of light-dark


• Turquoise • NYSE Euronext SmartPool

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