2. Dark Pools Are a ZERO SUM Game
• Traditional dark pools invited likeminded participants
• The objective was to minimize impact
• Newer entrants tend to invite a wider variety of participants with
different objectives:
• Institutions – minimize impact
• DMA flow – reduce cost
• Market makers, prop desks, and high frequency funds – earn short
term alpha
• Dark pools are a ‘zero sum game’ by construction
• The objectives of newer entrants make them less attractive to
institutions
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3. How to Extract Quality Liquidity
1 2 3 4
Optimally allocate to
Understand Separate Measure performance
minimize
contratypes in contratypes in and contratypes
Implementation
dark pools dark pools in dark pools
Shortfall
2
4. Understanding ContraTypes
Minimizes
Institutional
Impact
Block Order
May Support Stocks Institutional
Market Bound
No Spread Savings High Frequency
Adverse Selection Market Makers
Gaming Gamers
*Based on internal ITG research: “Are You Playing in a Toxic Dark Pool? A Guide to Preventing Information Leakage,”
Hitesh Mittal, Journal of Trading, Summer 2008.
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5. Separating ContraTypes
ITG’s Liquidity Filter technology uses this logic to interact
intelligently against each type of liquidity
Uses minimum size on orders
Uses order type Peg Passive without min size
Large Client
Order
Shuts down IOIs by sending small aggressive
orders
Avoids gamers by not allowing orders to
get pinged
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7. How to Measure Performance of a Dark Pool
• Implementation Shortfall of executed shares
• Fill rate
• Adverse selection
• Opportunity Cost: the cost of trading unexecuted shares
• Implementation Shortfall + Opportunity Cost
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8. Looking at Fill Rates Alone is Not Enough
15 bps Example: 6 Buy Orders
10 bps § Fill rate: 50% Great!!
§ IS cost on fills: Negative Great!!
5 bps
Price § Opportunity Cost: High Not Great
Time
§ Total IS cost:
5 bps
(IS Cost + Opportunity Cost) High Not Great
10 bps
15 bps
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9. Looking at Fill Rates Alone is Not Enough
• Fill rate: 25% OK
• IS cost on fills: 0 OK
Price
Time • Opportunity Cost: 0 Great!!
• Total IS Cost:
(IS Cost + Opportunity Cost) 0 Great!!
Higher adverse selection = Higher opportunity cost
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13. ITG’s Liquidity Filter
SM
At the Core of POSIT Marketplace
Separate toxic and Measure the
nontoxic contras performance of each
in dark pools dark pool and contra
Measure total IS of Allocate first to
orders and adjust highest quality dark
allocation pools and contras
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