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Alpha’s dark orders draw industry’s ire

Tim Kiladze - Globe and Mail

April 12, 2011

Late Friday, Alpha ATS quietly got approval from the Ontario Securities Commission to launch its new IntrasSpread facility. By Monday, there was already chatter of an uproar about the dark new territory it has created for Canada’s capital markets.

The IntraSpread product is “patently insidious,” railed Ian Bandeen, head of rival ATS Pure Trading, who swore he was speaking on behalf of the public’s best interest.

Although dark orders that can't be seen until they are executed are nothing new for Canada, Alpha's new product takes them one step further. Currently, dark orders can only be matched with “lit,” or visible orders. IntraSpread allows institutions to enter dark orders that can be matched with dark bids entered by retail players. That means both sides of the trade won’t be seen until the trade is completed.

That matters, because the dark market operates under different mechanics than the lit one. In the regular trading arena, all orders must be executed according to price-time prioritization. That is, the best price must win, and if two orders have the same price, the one that was entered first is executed.

Not so for the dark pool. In this new marketplace, institutional sellers can choose who they want to sell to. For instance, if an institution asks TD to sell 100,000 shares of a company, TD can enter the trade in the dark pool as an institution. But it can also set up an algorithm that tells its sell order to look for TD retail bids first. TD can even go so far as to tell its algorithm to look for bids in a certain orders, so TD bids could be first then RBC's, then CIBC's. Preference can also be given to larger sized orders over smaller partial fills that were posted first.

That Mr. Bandeen is frustrated is one thing, but CIBC, Alpha’s largest owner, also voiced concerns in a comment letter submitted to the Ontario Securities Commission when the OSC was debating its approval.

“CIBC would strongly oppose any features at IntraSpread or any other dark venue that would permit dealers to select their counterparites,” the letter stated.

Moreover, the bank voiced concerns about exclusionary trading practices and noted that selective preferencing, or exposing trade flow to a pre-determined group of dealers, is an “unacceptable model.”

Alternative trading platform Chi-X echoed those ideas in its own comment letter. “...We believe that the benefits offered through innovation should be enjoyed by all market participants and not be restricted to serve the interests of a limited few.”

Mr. Bandeen is particularly upset because Canada’s capital markets have been praised globally. “We’ve always had an opportunity in Canada to learn from the mistakes of the Americans,” who allow rampant dark pool trading. he said. “This initiative is just a massive step backward in the opposite direction.”