The dark pools of liquidity may be shallower than they seem, according to a Morgan Stanley trading executive.
Accounting processes and competition may have exaggerated the volume figures from more than 40 so-called dark-pool trading venues, Andrew Silverman, managing director of Morgan Stanley, warned at the Reuters Exchanges and Trading Summit in New York yesterday.
Dark pools are private trading networks that allow firms to match buy and sell orders anonymously through internal systems. Big investors favor dark pools because they allow them to keep their trading intentions hidden from the open market.
The problem is that there is no standardized method for reporting trading volume on dark pools, and as a result, that volume is sometimes misstated, Mr. Silverman told Reuters.
Providers of these trading venues have the incentive to show large trading volumes, which attract liquidity, he said.
One transaction of 10,000 shares could be counted four times in a dark pool, because orders are quickly routed through different venues before being matched, Mr. Silverman said.
Dark-pool volume makes up 5% to 9% of U.S. equity trades, not the 10% to 20% that market analysts believe, he said.
“The volume in the dark pools is very overstated,” Mr. Silverman said. “There are a lot of issues with people claiming volume where there isn’t.”
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