72% of the Buy-Side are dissatisfied with dark pool transparency

As many as 72% of the head traders at 92 asset managers and hedge funds interviewed by TABB Group for “US Institutional Equity Trading: Crossroads of Best Execution,” the third and final part of their 11th annual benchmark research study series, reported they are dissatisfied with transparency levels in dark pools, citing the need for improvements in matching logics and order handling disclosures.


Over half of these firms cited execution quality as their top 2015 initiative, focusing on sourcing liquidity and routing and venue analysis. These buy-side firms have raised their expectations for improved order handling transparency, say Sayena Mostowfi, head of US equity research, and Valerie Bogard, research analyst, who co-wrote part three, which examines how the buy side measures execution quality and their opinions on what changes to market structure would improve market confidence, including a comparison of aspirations with expectations as US equity market structure comes under a new SEC spotlight.



Most buy-side firms are already familiar with algorithms and adept at venue analysis, Mostowfi says, but  now want a much deeper analysis of liquidity. “They’re not satisfied simply knowing what happened to their order; now they want to know what could or should have happened that would have resulted in a better execution.”


This increase in control and responsibility is causing a shift in the broker/client relationship, providing as many challenges as opportunities for brokers.


“One thing’s clear,” says Mostowfi, “market structure reviews and buy-side demand for ever-greater transparency are going to produce changes in the market place.”


A sampling of TABB’s findings includes:


  • 73% say Congress should not be involved in regulating market structure due to their lack of detailed knowledge and political agenda bias.
  • 45% rely on brokers controlling routing of orders to dark pools, while 43% have a more collaborative process.
  • For 74%, trade size matters when evaluating dark pool executions, but cite other components as crucial factors, including liquidity, price, fill ratio, slippage and natural flow.