Real Example. Dark Pool Shennanigans. What’s in Your Secret Sauce?
We, your friendly neighborhood corner brokerage firm, from time to time provide you with a glimpse of what we see each day. I guess we feel that even if an example highlights how one of our orders got taken advantage of at a specific point in time, it is worth bringing the example out into the light. We want you all to learn from it. We want the owners of the orders to learn, understand trade-offs, and ultimately protect their money from those who wish to do them economic harm.
I am sure you all have had your share of algo salesmen in your offices. You know… the dark pool aggregator salesmen, with their cheap suits, Aqua Velva cologne, and squeezie balls. They entice you with their charts. Their fill rates. Their list of destinations they hit for you… you know… to provide you liquidity?
We use a plethora of tools to play in the sandbox each day. One such tool is a dark pool aggregator that allows us to tweak many variables in our interaction. One such variable is which destinations we frequent. We tweak all the time, and we were at a spot where we found the tool useful; we feel we had struck the proper balance between accessing dark liquidity to our clients benefit and leaking information and adverse impact.
We liked the tool. We asked if they would lower our price, as we were using it much more. To our pleasure, they did! We agreed to the rate reduction, but on our first day we noticed much more market impact and wiggle when we launched order flow into this aggregator. We called and asked what was going on. The explanation given was that they added back in all the specific dark pools that we had weeded out over the last few months. Mouths agape, blood pressure heightened, we asked them to again remove all those dark pool destinations that we originally opted out of. Long story short, we no longer have a rate reduction, and we will probably no longer get squeegie balls. Our salesman told us he had to raise the rate back up, as our destinations were premium ones, that cost more. He also tried to scare us by saying we were going to get less liquidity! His final point was that he was going into a client’s office in minutes who traded four million shares a day with him, who didn’t give a crap about all the annoying crap we were fussing about. Our response? That’s the problem. That’s the friggin’ problem. Our voices are hoarse.