Dark Pool Trading
A picture is worth a thousand words
Introduction
Once the sales team (sell side) onboard a client , the required infrastructure/ provisioning is set up based on trading preference. For example a client could opt for trading in High touch plus dark venue, or Low Touch plus dark venue .
Low Touch orders get routed through dark pool first and unfilled portion of the order is routed to a lit (exchange) venue for execution.
High Touch order is first routed to dark pool, if the trader is lucky and the order gets filled, Bravo !. Else, the Sales Trader manually recreates the order and routes to the exchange.
The venue of execution depends on client’s trading preference and the agreement they’ve had with the Sales & Trading Teams .
The commission charged by the Broker would vary based on the venue of execution.
How is an execution reported
The exchange is not aware of execution in a dark pool until reported. Typically dark pools are governed by local securities governing body. For example - SFC in Hong Kong, SEC in the US etc.. Once a trade gets executed in Dark, the execution is reported to the local exchange by the Dark pool Operator.
Blotter Scraping
This is a fairly recent technology. Blotter Scraper is an algorithm that scrapes the trade blotter and reads through the order details of participating Buy side traders. If there is an opposite side in the Dark pool, traders gets an alert, who could then choose to either ignore the alert or act on the alert by sending order to the dark pool for execution (within a specified time interval).
Broker Dark Pool Network
The diagram above provides you with an understanding of “Broker dark pool network”. In order to provide clients with access to broader dark liquidity, Dark pool Operators sign reciprocal liquidity sharing agreements. Individual sell-side with smaller pools come together to form a bigger pool. When an order fails to find liquidity in the Dark pool of the Broker that a client placed the order with, the order further scans Broker dark pool network for liquidity (if the client has been enabled to do so).
