Study looks at dark aggregators

There's been a lot of worry that small-order dark pools have fragmented the market, but there are lots of linkages among these pools designed to work against fragmentation, one such linkage is represented by dark aggregators. Which now account for up to a quarter of total market liquidity. 

A recent study from Pipeline Trading Systems and the buy-side firm AllianceBernstein, "Adverse Selection vs. Opportunistic Savings in Dark Aggregators," concludes that dark aggregators can often lead to so-called adverse selection, when one trades with counterparties that have an advantage over them. Essentially, you are trading at the worst possible moment, right before price improvement becomes reality.

How might this occur? Suppose you're trading actively with small-order dark pools, you end up trading against high-frequency traders, who have alpha models that allow them to trade at advantageous prices; you're the loser. According to Traders, the study also concludes that firms can measure adverse selection costs and any "opportunistic savings that can be achieved by using dark aggregators." Assuming of course that you have proper controls built in. So it's not always a losing proposition. 

For more:
- here's the article from Traders

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