Shedding light on dark pools

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					 C A p i TA L M A R k e T S




         Alternative pools of liquidity                     ThE hoT TopICs in the global equity market space
                                                            right now are ‘dark pools’, ‘high frequency trading’
         (so-called ‘dark pools’) match                     and ‘flash orders’, and how they affect the
                                                            functioning of the world’s stock markets. With
         up volume buyers and sellers                       continued growth in the market share of alternative
                                                            trading systems, competition has accelerated, and
         in the ‘upstairs’ or undisplayed                   the economics and the impacts of some business
         liquidity market to achieve the                    models are being questioned. With so many
                                                            competitors chasing liquidity flows, there are claims
         best executions possible.                          that some innovations have resulted in an unlevel
                                                            playing field, benefiting a few at the expense of many.
         They use technology to make                             This debate can be very confusing, with much
                                                            self-serving rhetoric coming from exchanges,
         the process more efficient,                        brokers, investment managers, hedge funds and
                                                            principal traders – all with different agendas, risk
         by linking wholesale orders                        appetites and investment criteria. Realistically, no
         together and allowing                              single outcome will keep everyone happy. Controls
                                                            certainly need to be maintained to ensure capital
         anonymous interactions                             markets maintain their integrity, but not at the
                                                            expense of innovation and better outcomes for the
         between buyers and sellers.                        market overall, in terms of both implicit and explicit
                                                            transactions costs.




                                   sAm mACquEEN is Joint Head of Liquidnet Australia, based in Sydney.
                                   Liquidnet Australia lodged its application for an Australian market licence in May
                                   2007 and, while it awaits regulatory approval, local trades matched by its system
                                   are routed for execution to an ASX-member broker and remain subject to ASX
                                   market rules.

                                   smacqueen@liquidnet.com




44       INFINANCE december 2009                                                The magazine for Finsia members
                                                                                               C A p i TA L M A R k e T S




    The debate is really about whether technology
is making the industry more efficient. While financial
                                                            This undi
				
DOCUMENT INFO
Description: The hot topics in the global equity market space right now are dark pools, high frequency trading and flash orders, and how they affect the functioning of the world's stock markets. With continued growth in the market share of alternative trading systems, competition has accelerated, and the economics and the impacts of some business models are being questioned. The debate is really about whether technology is making the industry more efficient. While financial markets haven't seen a lot of technological advancement over the past decade, this is now changing very rapidly. For wholesale investors, volume discovery is the key. Typically exchanges have been very good at price discovery. High-frequency trading is an extension of this as trading type funds use algorithmic strategies to try and exploit perceived short-term inefficiencies in markets. The current debate on alternative liquidity pools has been timely given the Australian Government's recent decision to change the supervisory structure in the domestic equity market space.
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