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But as dark pool liquidity has grown, even in a volatile environment, these venues are looking to aggregate small orders to create blocks. Goldman Sachs Sigma X, for example, recently rolled out a point-in-time daily cross, Sigma X Cross, to facilitate matches between large orders and reportedly will introduce a block alert that will notify institutions when there is a large order present in the pool.
Exchange flows also are converging with dark pools to bolster block trading. In February the New York Stock Exchange launched the New York Block Exchange, or NYBX, a joint venture with BIDS Trading, a dark pool owned by a consortium of big brokers. NYBX will match the NYSE's public, reserve and hidden order flow from the floor with smaller, algorithmic orders in BIDS. Meanwhile LeveL ATS, a dark liquidity pool that is also owned by a consortium of brokers, is preparing to introduce a block order type.
So could block trading make a comeback in this new high-tech format?
One reason why the broker pools have attracted volume is that they are cheaper and faster than traditional block crossing networks, and they're open to algorithmic trading. Algorithm technology and the value proposition offered by algo trading strategies for highly liquid stocks has become too good for the buy side to pass up, says Larry Tabb, CEO of TABB Group, who adds that the fee differential is pushing the buy side toward broker dark pools.
"If someone is sitting on a desk with 5,000 shares to buy, the other side might be in an algorithm," adds Whit Conary, CEO of LeveL ATS in Boston. "Unless you're willing to match against those smaller lots that the algo is breaking it into, you'll never trade."
Further, institutions don't want to put a block order into a venue amid volatility because they are afraid prices will quickly move away from them, according to Conary. To prevent blocks from executing as the market moves away, he relates, LeveL is creating a virtual block order type that will allow traders to control the amount of stock LeveL can trade within certain time buckets. That way, Conary explains, if the stock moves away from the institution, the trader doesn't end up executing the entire block at a worse price.
Nonetheless, broker dark pools rely on a vastly different operating model than independent crossing networks, and it isn't clear how comfortable buy-side institutions will be with entering block orders in the dark pools. Dark pools "just link up to each other, and they're all accessing the same volume," says Jennifer Setzenfand, VP and senior trader at Federated Investors, who notes that buy-side traders are concerned about information leakage and dark pools sending out indications of interest (IOIs) to other pools.
"When you are talking about straight Liquidnet, that's a completely different vehicle," she continues, referring to the independent status of Liquidnet. The buy side will go to a Liquidnet or Pipeline with size because they trust the systems and might find a big natural contra there, Setzenfand adds. But, "Once you get out of an insulated dark pool and peg or ping other pools, then it's just the same" as making your intentions known to the market, she says.
For their part, the dark pools claim they protect against information leakage. For example, LeveL ATS' Conary insists the dark pool doesn't send out IOIs, and in a recent press release Goldman Sachs noted that "Sigma X is completely anonymous, serving investor requirements that IOIs are not published internally or externally."
Even as the debate persists, both models are likely to co-exist. While blocks remain important to the buy side to minimize market impact ("I'm a fan of bringing back blocks," says Federated's Setzenfand), they are likely to get smaller as institutions continue to increase their use of algorithms and automated venues. Perhaps aggregating small orders into sizeable blocks could be a whole new way of trading.
