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Is it FINALLY time to Turn on the Lights? (to analyze order routing)

Traders Magazine Online News, January 18, 2018

David Weisberger

Bloomberg published an article called “Trader VIP Clubs, “Ping Pools” Take Dark Pool Trades to New Level” which described the rise of single dealer platforms.  While the article is accurate that such platforms are gaining market share, that they provide market makers a method to provide better liquidity to better clients, and that MiFID II essentially promotes a close cousin to the US pools called “Systematic Internalizers,” it creates an interesting impression.  For example, reading this article, one would not understand that the architecture of the larger “Ping Pools” is such that the market maker responds by algorithm inside of the pool to inbound orders.  In many cases, orders that are not filled are not communicated to the market maker’s other systems at all, or the market makers have strict rules against utilizing the information in real time.

That said, if there was a reasonable disclosure regime on the part of routing brokers, the statistics would either show the value of these pools or call into question why brokers route there.   I have called for specific, statistical disclosures  in multiple comment letters to the SEC and described the idea in previous posts.  Simply put, routing brokers should be required to show statistics per routed venue, broken out by order type.  In this case, analysis of Marketable, Immediate or Cancel orders, sent on behalf of “Not Held” orders, grouped by size buckets, would paint the needed picture.  If, for these orders, the number of shares ordered, fill rate, and execution stats such as price improvement and effective spread were provided per venue, it would help clients understand the routing.  If, however, the statistics also included the short-term price movement after sending the un-executed orders, it would help to determine if there is consistent information leakage.  This is a bit problematic, if the behavior of the routing firm is to immediately route the order elsewhere when it is not filled.  In those cases, it is quite possible that the statistics would show leakage, but the cause might be subsequent orders and not the order routed to the single dealer platform.  Brokers, however, would know their own behavior and should consistently look for this type of price movement in order to determine if the venue can be trusted.

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