Measuring the Economic Value of Agency Broker Dark Pools - The exemplary Case of Liquidnet

2010 February 01

Jours fixes take place on the first monday of the month, starting at 5:00 p.m., in the House of Finance (Campus Westend).

[Bartholomäus Ende, E-Finance Lab]

Within securities trading, so-called agency broker dark pools have become increasingly popular nowadays. In the USA more than 40 dark pools have already been operating and cover approximately 9% of the overall trading volume. One reason for their popularity is the market model employed. In contrast to traditional exchanges the market model is based on limited transparency and access. Thus, agency broker dark pools promise institutional investors to trade large order volumes anonymously, which enable them to avoid negative price movements (market impact). While the limited transparency of agency broker dark pools might satisfy the trading needs of prominent investors, it complicates the assessment of their benefits.

This presentation outlines how agency broker dark pools can be evaluated empirically. Therefore, the case of Liquidnet Europe, a major agency broker dark pool, is chosen. It is used to illustrate how the business value provided by agency broker dark pools (in terms of better execution prices) can be evaluated.