People in the Trade: Kyle Zasky
Published on June 27, 2008.
Dark liquidity sources have evolved in recent years to become a significant part of the equity market structure, primarily for their ability to reduce market impact for large block trades. As well as buy-side-only dark pools, like Liquidnet and agency broker ITG’s POSIT, broker-owned internal dark pools, also known as systematic internalisers, are claiming a growing share of the market.
However, although dark pools deliver price improvement and anonymity, buy-side traders are faced with the inconvenience of connecting to multiple dark pools individually. In the US liquidity sharing agreements now abound. Liquidnet CEO Seth Merrin indicated his openness to sharing liquidity at the recent SIFMA conference, and Goldman Sachs, Morgan Stanley and UBS recently struck a deal to allow each others’ algorithms to access their internal non-displayed liquidity pools.
But what about Europe? As more dark pools are launched to take advantage of post-MiFID liquidity fragmentation, when will liquidity sharing agreements reduce the buy-side’s connectivity headaches? Kyle Zasky, managing director, Knight Capital and co-founder of US agency broker EdgeTrade, warns that dark pools that are not open to connectivity will be left behind in the traders’ quest for best execution.
“I think that either you do it proactively, or the market forces will end up marginalising you,” he comments. “It’s not a philosophical thing where I believe everyone needs to hold hands and be friends, rather a hard business analysis of what the end-user is looking for. Interconnectivity between the myriad of liquidity destinations, whether regulated or not, just makes good business sense.”
A key reason for the inevitability of dark pool linkages is the fickle nature of liquidity in the age of automation. “Once you have electronic connectivity, liquidity can rapidly move from one venue to another for whatever rational the user chooses,” says Zasky. “Liquidity can shift because of pricing, perceived market depth, speed, functionality and many other reasons. This type of environment breeds competition which ultimately benefits the user community."
However, the complexities of the European trading environment means technology will be critical. “Connectivity across Europe is going to be more difficult but will have a greater impact than in the US,” says Zasky. “Cross-border regulatory and clearing inconsistency, exchange rates, vested interests by incumbent exchanges and various competing business models will all have a hand in the ultimate outcome. Dark pools, all pools for that matter, need electronic connectivity and smart order routing to be successful and create a unified market structure in Europe.”
While many brokers cautiously leave the door open for liquidity sharing, Zasky insists they should step boldly into partnerships for the sake of the longer-term benefits. “There were challenges and struggles in getting the euro off the ground ten years ago, but now it has been proven that a unified European currency can succeed,” he says. “I don’t think dark pool connectivity will take a decade, but there will be a lot of work over the next two or three years as this is all sorted out.”
