Hard to compare apples with apples in the dark – The TRADE Poll

Comparing execution performance remains a major headache for institutional investors who use dark pools, according to theTRADEnews.com's May poll.

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Comparing execution performance remains a major headache for institutional investors who use dark pools, according to theTRADEnews.com's May poll.

Asked to rank the biggest challenges for buy-side traders when accessing dark liquidity, over 48% of respondents felt that comparing execution performance was the major difficulty when using dark pools.

Understanding smart order routing (SOR) logic was the second biggest challenge, with almost 27%, while 25% of respondents felt regulatory uncertainty was the most important issue facing buy-side participants.

Comparing execution performance through transaction cost analysis (TCA) is a major concern to all buy-siders who need to demonstrate the value-add they provide to portfolio managers.

Bill White, head of equities electronic trading at Barclays, said: "When Tag30 came up the market gained access to a huge amount of post-trade data, but often the buy-side lacks the resources it needs to properly analyse this data." 

So, while innovations like Tag30, which provides standardised post-trade information, showing which venue a sale was eventually completed in, have enabled the market to record and store more data on trades than ever before, being able to analyse these trades and create meaningful graphs and reports to demonstrate best execution is a much more daunting prospect.

A number of dark pool operators and brokers have sought to make data easier for buy-side firms to process by providing their own reports and statistics on execution performance.

"The buy-side is absolutely flooded with data at the moment, and it's important for us to interpret that data and examine how measures like changing an algo can impact the client", one SOR operator told theTRADEnews.com.

Outsourcing TCA

While some buy-siders are looking to rely on their brokers to provide them with useable information as part of their TCA, some are looking at a more independent approach.

"It's true that a lot of buy-side firms lack the resources to properly process all the data they receive," says Simo Puhakka, head of trading as Pohjola Asset Management, which also operates its own independent SOR. "They are right to be concerned about how to handle all this post-trade data, but there are now a number of independent houses out there that are offering outsourced TCA services to help them make sense of the information."

Getting to grips with the routing logic behind SORs is something the buy-side is keen on as traders become more aware they can achieve better execution prices and take control of the quality of their liquidity.

Brokers are reporting an increased interest by clients in gaining a sophisticated knowledge of routing logic and how it might be used or adapted to achieve the best execution for their trades.

In terms of the regulatory environment surrounding dark pools, there have been growing calls to fully regulate the market and make it more transparent, with the US's Financial Industry Regulatory Authority (FINRA) saying it would seek to investigate dark pools earlier this year. 

However, many are concerned that making the market more accountable should not seek to reduce the opacity of the order book, as this is essential to maintaining the role of the dark pool as a way to minimise information leakage.