It's no secret that the orders handled by the sell-side are getting chopped up into smaller and smaller pieces. That's been going on for years, radically changing the dynamic of block trading. But as orders continued to get chopped up and as the fallout from the Pipeline Trading fiasco continues, Waters offers a timely look at smart order routers deployed by sell-side firms as they relate to dark pools.

The whole point is to find liquidity in ways that allows the client to remain anonymous and without rippling the markets.

"Many of the top SOR providers will brag about the outstanding characteristics of their algos. Deutsche Bank's SuperX says it has a dynamic-return model and smart-allocation model for order protection. Goldman Sachs' GSET leverages historical analysis when choosing a venue. Knight's FAN uses so-called ‘heat maps' to redirect orders. But the truth, analysts say, is that many of the algos have become commoditized. If there's a good idea out there, chances are a lot of sell-side players have it," the article notes.

It appears that more buy-side firms are asking for more transparency, apparently unwilling to accept that SORs and even the end-destination dark pools are acting in their best interests at all times. They need more information.

"Some buy-side firms are asking for summary reports, or cheat sheets. Some want information on a granular level, and want to know exact details on each and every algorithm. Sophistication on the buy side is still very stratified. In the post-Bernie Madoff era, the sell side has no choice but to oblige," the article notes.

Some on the buy-side would like help from an SOR that can ring-fence their orders from high frequency trading entities. In the end, sell-side firms will have to do more than enhance their SOR engines. They have a huge marketing challenge ahead of them as well.

For more:
- here's the article

Related articles:
The future of Pipeline Trading Systems   
Beware: Dark pool orders can turn to the light