The seepage of liquidity away from traditional execution venues to internal dark trading pools is continuing unabated according to share trading data released by US electronic broker EdgeTrade.
EdgeTrade says between August and October, a daily average of 27.4% of clients' executions were completed in dark pools through its smart order execution algorithm Fan. The vendor compares the stats to estimates from Tabb Group that 9.4% of all US equity shares are currently executed 'in the dark'.
EdgeTrade's Fan algorithm simultaneously sprays aggregated displayed and non-displayed markets, and then continuously moves an order in line with shifting liquidity until best execution is fulfilled.
Kyle Zasky, EdgeTrade president, says liquidity once considered scarce during volatile market trading "has now been made more accessible and actionable through the proliferation and active use of dark pool algorithms".
"This trend is coming full circle with the market volatility witnessed over recent months. What could have been a summer and early fall of discontent for many traders has instead become their epiphany," adds Zasky.
Joseph Wald, CEO of EdgeTrade, says with the right tools and market connections, traders are seeing their orders filled in the dark "without information and price repercussions systemic to negotiation with a trading desk".
EdgeTrade's smart order execution strategies encompass its Covert and Sumo algorithms along with Fan. Covert, which is an extension of Fan, is a tool for institutional traders looking to capitalise on the benefits of sending electronic orders to dark pools only, while Sumo is an aggressive, time-sensitive strategy designed to get trades done quickly while minimising market impact and information leakage.
Research released last year by Boston-based consultancy Aite Group predicted that more than half of all equities trading in the US will be done using algorithmic dealing systems by the end of 2010.
However some traders feel that the recent market volatility has shown the limitations of algo trading in equities and FX, according to a recent Reuters report.
A large number of trader and hedge funds are thought to have ditched algorithmic methods and reverted to more traditional trading procedures when markets were at their most volatile in August, says the report, which cites bank sources.