Opening Cross: Afraid of the ‘Dark’? Chill Out!


Hard to believe, but it’s already nearly February. Suddenly the stores are full of Valentine’s paraphernalia, and the temperature is becoming chilly, with the threat of snow here in New York. But while snow can provide a pristine canvas on which errant objects are readily apparent and easily identifiable, it can also hide a multitude of sins beneath its drifts.

In a market data analogy, snowdrifts are like dark pools—the antithesis of market data: they obscure transparency and effective price discovery. Now that’s not to say dark pools don’t have their place as a means to efficiently execute large block orders in a manner that might upset the open marketplace—which could arguably have a more detrimental effect on the investing consumers that most regulations are designed to protect than would the transparency and resulting market impact of seeing those blocks offered up to the open market.

While regulators want to shine a light into the darkness by moving some dark and brokered asset classes onto exchange-like platforms, new models are emerging to obscure transparency—not always with malicious intent—such as Squawker’s block trade negotiation platform (IMD, Jan. 21), which uses data from SIX Financial Information to create mid-point and end-of-day VWAP prices, but only distributes prices when participants agree a trade, rather than in real time.

Of course, these models only work for some sub-sets of trading activity. For example, “dark” trading models don’t gel with the shift to high-frequency and algorithmic environments, which crave ever-increasing amounts of data. Dark pools are much like, well, a dark pool. If you drop a baited hook into the pool, eventually something’s bound to bite. But in this circumstance, the high-frequency approach doesn’t work so well: Try firing a machine gun into the opaque waters, and see if you hit anything.

But for that matter, try the scattergun approach in a lit market: Even that’s not guaranteed to hit anything, which is why markets are finding new ways to differentiate themselves and advertise the quality of their liquidity against other fragmented markets—such as Direct Edge, which is about to introduce fees for the feed of attributed quotes it launched last year as a means of providing greater transparency into the quality of quotes on its books, rather than just their price and size.

Vendors are following suit with products that deliver specific, differentiated datasets, such as Activ Financial’s new Canadian US Interlisted feed of trading in Canadian stocks on US exchanges, aimed at Canadian traders, while the emergence of new, financial-focused data search engines like 9W Search and Quandl (IMD, Jan. 12) is responding directly to the ever-growing need for more data, and increasingly, for data delivered in specific ways that make it easier to consume, digest and understand.

Demand for greater transparency is one of the reasons that Dion Global Solutions is incorporating more over-the-counter data from Tullett Prebon Information into its Dfferentia OTC pricing and valuation platform, starting with interest-rate products before adding commodities at a later date in response to demand for oil data as a leading indicator of broader market movements. And with a chilly February forecast, demand for oil and data related to all energy and heating-associated commodities is likely to increase.

To come full circle, the fact that February has crept up so quickly reminds us that there is much to do, and so little time. Despite the cautious optimism expressed by many about the potential of 2013, the fact remains that this optimism won’t be realized by itself: no one gets to the mountaintop without a hard climb, and the hard climb to financial success in 2013 will require investment, diligent work to implement often-overdue projects, and the involvement of all participants for the overall good. After the past few years, there’s much more to be fearful of than the dark—especially when we have the torch of transparency and ever-widening data to light our way.

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