Shedding light on Dark Liquidity

Bottom-line: Investec added further dark liquidity capabilities to its algo trading suite earlier this year. We provide an easy-reading guide to the Dark below, and a practical example of how a trader would use it.

Anonymity in the Dark

‘Dark’ markets add a layer of anonymity to trades put through the overall market order book. ‘Lit’ markets show traders’ intentions to all market participants in terms of the size of their trades and prices, while ‘Dark’ markets allow them to keep this information anonymous (i.e. there is no visibility on the indications of interest). This additional privacy allows for large trades to be executed with minimal stock price impact due to information leakage and lowers transaction costs.

Two Paths to the Dark

Investec’s electronic trading algorithm suite provides access to the Dark via two channels:

  1. DarkDirect (passive) … is a limit / market order posted directly to the Dark; e.g. buy X number of shares in a specified stock at XX share price. So a trader could place a limit order (specified price) in the Dark for 1 million Shoprite (SHP SJ) shares; the order will rest at that price until a matching order comes in on the other side
  2. ‘Would’ Smart Order Routing (active) … via the VWAP, TWAP, or Participate algos seeks blocks in both Lit and Dark venues; e.g. buy X% of an order at XX share price (and the algo actively searches both venues in an effort to complete the order quicker). Here, a trader using the Participate algo, adjusts their instruction to ‘would’ 30% of their overall Shoprite ticket at a specified price



Investec’s Dark Liquidity in Action

  • Using Shoprite (SHP SJ) on 11 July as an example
  • A trader wanted to buy 700k SHP SJ shares
  • Note that USDZAR was 18.49, and strengthened to 17.55 over the next few days, during which time SA Inc was rallying hard
  • Investec’s pre-trade models show that this order size would be ~45% of ADV, which would take an estimated 3 days at 20% of volume with an implementation shortfall of 1.8%
  • The stock jumped +2% shortly after the open and the trader tried to work their ticket through the day using the Participate algo accessed via their OMS (EMSX, Iress Pro, Charles River or FlexNow)
  • At 14h30, in order to complete the trade before another price jump at the close, they updated their order to ‘would’ 30% of the ticket where the Participate algo seeks a block seller below ZAR231
  • The algo found liquidity in the dark and traded 176k shares / ZAR41mn over 15 minutes at ~ZAR230
  • The trader then ‘woulds’ the remainder of the ticket at a new limit of ZAR232
  • The Investec Participate algo subsequently found an additional 440k shares / ZAR102mn in the dark at ~ZAR232, while ensuring that the trader wasn’t overbought (given that they were working some of the order in the market over the day)