Friday, May 30, 2014

dark pools - a few observations

Most common Alt Trading Service is the dark pool, often operated by a sell-side bank (GS, Normura etc).

A "transparent" exchange (my own lingo) provides the important task of _price_discovery_. A dark pool doesn't. It receives the price from the exchanges and executes trades at the mid-quote.

Market order can't specify a price. You can think of a market buy order as a marketable limit order with price = infinity. Therefore, when a market order hits a limit order, they execute at the limit price. When 2 limit orders cross, they execute at the "earlier" limit price.

Therefore, on the exchange, I believe all trades execute either on the best bid price or best ask. I guess all the mid-quote executions happen on the ATS's.

Dark pool is required to report trades to the regulator, but often with a few sec longer delay than an exchange.

Dark pool may define special order types beside the standard types like limit orders or market orders.

Forex is quote driven, not order driven. Forex has no exchange. The dominant market is the interbank market. Only limit orders [1] are used. However, within a private market operated by a single dealer, a "market order" type can be defined. I feel the rules are defined by the operator, rather than some exchange regulator.

[1] A Forex limit order is kind of fake - unlike the exchange's guarantee, when you hit a fake limit order that dealer may withdraw it! I believe this is frowned upon by the market operator (often a club of FX banks), so dealers are pressured to avoid this practice. But I guess a dealer may need this "protection" in a fast market.

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