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Bloomberg Algo Shines Light into Dark Pools

Wednesday, September 01, 2010

By James Ramage

Bloomberg Tradebook is giving its buyside clients a flashlight they can use to peak inside dark pools and gauge how their orders are executing.

The broker developed a new algorithm to do this, called B-Dark. Customers send orders into dark pools through the algo and then can see how they're performing. B-Dark uses the arrangements Bloomberg has secured with dark liquidity providers to deliver real-time visibility into dark pool executions.

Currently, B-Dark lets users see into the 15 dark pools Bloomberg is connected to directly. This provides a view into more than 90 percent of dark liquidity across the industry, according to Raymond Tierney, chief executive and president of Bloomberg Tradebook. More important, visibility into alternative trading systems gives the buyside the information they'd need to re-route their orders if they're not finding sufficient liquidity in a particular dark pool.

"They don't find out at the end of the day that they made a bad decision with an algo choice; they can find out in real time that they need to make adjustments," Tierney said. "And the more information that buyside clients can get around in real time, on demand around the venues that they're engaged with, the better they will be in understanding how to manage and re-distribute their liquidity."

In developing B-Dark, Tierney said he drew from his experience as global head of equity trading at Morgan Stanley Investment Management. While there, he remembers pushing for increased transparency from brokers around choice of venue analytics. Tierney remains a proponent of transparency since joining Bloomberg Tradebook, and so does the buyside.

One buyside trader who declined to be identified called real-time dark pool transparency "helpful," and that more firms should provide it. "It's not universal," he said, "but it should be."

The regulatory environment over the past year has also been important, Tierney added. Regulators have also been calling for more transparency into dark pools. Brokers have gotten the message. Tierney said he hasn't gotten much pushback from the brokers for handing real-time analytics over to Bloomberg Tradebook clients for B-Dark.

"Transparency has become more the buzzword in the last six months, more than it has in the last couple of years," Tierney said. "It's a natural evolution of where algos and information needs to go to, in light of people starting to understand what a high-frequency trading strategy is, and how it interacts with the liquidity that they're seeking."

B-Dark definitely hits on a developing trend, according to Justin Schack, director of market structure analysis at broker Rosenblatt Securities. Buyside traders have been asking for more disclosure on where exactly their orders go once they hit their "Send" buttons.

And getting this information on a venue-by-venue basis in real time is also crucial to them, he added. Still, real-time venue reporting means lots of information. The buyside needs to be prepared to process it, Schack said.

"Real-time disclosure is something of a two-edged sword," Schack said. "To get all this information is one thing. But to have the intellectual capital and the technological resources to be able to process, interpret and analyze all this data, as well as act on it, is another thing entirely."

B-Dark sets urgency levels and specifies levels aggression for seeking dark liquidity, Tierney added. It also comes equipped with anti-gaming logic, including order randomization and real-time venue-slippage analysis.

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