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With the recent purchases of Liquidnet & BIDS, both dark venues for US equities, I want to pen a thread on the *general* mechanics of how these venues work, and how they're different from public exchanges. With both venues, institutions trade speed for secrecy:
Say there are 8 large participants in the market for shares of $AAPL. One wants to buy 1 million shares (~$116M), another wants to sell.
Keep in mind they may not be in the market trading at the exact same time.pic.twitter.com/V9RieWgQpu
If a public exchange is used, an order of this size would be seen on the order book and could move the market, hurting each trader's P&L.pic.twitter.com/2OY6JDTRPp
If a dark block venue is used instead, each large trader's order management system (OMS, or trading screen) is hooked up to each other through the Liquidnet or BIDS network.pic.twitter.com/jyzh8uwlkK
The dark venue scans everyone's system, looking for orders. When two orders match, the trade is executed and reported to the public. Remember, w/the public exchange the ORDER BOOK was revealed, but here only the TRADE is seen by others.pic.twitter.com/MF1lkt7OT8
Pros of dark venues: secrecy. Participants don't know who they're trading with or how big the market is moving until a trade is finished. Cons of dark venues: time. If there are no sellers of your AAPL shares in size when you're looking to buy, you'll have to wait for a fill.
Here's an interesting (but dated) paper on Liquidnet & the POSIT dark pool (owned by $VIRT now) for those interested in more:
https://poseidon01.ssrn.com/delivery.php?ID=577095118088028086069093086069098099035036062037000048094079106117119089081123111086045012028058107057125107120007099000064016106071061017042013114124124087108014045044119126008001002064110003102013112080067088029092084127064030120116072120127066&EXT=pdf …pic.twitter.com/QIPAHZry5M
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