Many institutional investors have misgivings about the actual levels of anonymity and liquidity provided by broker/dealer and exchange-operated dark pools, according to new research released by Greenwich Associates (GA) which found varying policies and practices among providers.
Some venues that are marketed as dark pools actually route orders to external destinations, says the study, which also found that systems have varying policies related to anonymity and information sharing/leakage.
"The fact that a broker/dealer or exchange calls its platform a "dark pool" does not make it dark," says GA.
Among the 64 institutions polled, more than two-thirds said their providers do not disclose how they calculate volume within the dark pool. When they do, the numbers are often massaged, by double counting matches and/or including orders routed to alternative liquidity providers as part of the dark pool's overall volume.
Many institutions are also unclear about the levels of anonymity promised and the nature of the interaction between client and proprietary order flow.
"In nearly all cases, even if the broker/dealer or exchange does not disclose this information up front, they are obligated to provide it upon request," advises GA consultant John Feng.