Insights & Commentary

Market Structure

Finding Differentiated Liquidity in the Dark

Mar 14 2017

Desk commentary by Jennifer Hadiaris

How to identify differentiated liquidity in dark pools by stock and sub-sector, and how to better access it.

In this note:

  • We analyze trading in dark pools to determine the degree of differentiated liquidity in each venue by symbol and sub-sector, and factors that can lead to over-weighted or under-weighted liquidity in a venue.
  • We review how Cowen has incorporated this market structure research directly into our dark routing to improve client executions.
  • We also look at how clients may want to use this research going forward.


In today’s incredibly interconnected markets, it’s a common assumption that all firms are pretty much routing orders to many, if not most venues. Liquidity seems largely transient from one venue to another depending on fees, rebates, ownership structures, client instructions and other key factors. Dark venues are no exception to this rule. 100- and 200-share “pings” are often routed around to dark pools to attempt find liquidity in the 30+ ATSs that are available today. Some firms maintain dark pools and they may choose to prioritize their internal venue when resting order flow, however they are largely still pinging out orders to other venues across the street and will often pick up orders and move them to those venues where they are finding liquidity. In short, firms have developed sophisticated routing strategies to effectively glue this highly fragmented market back together.

Despite this interconnectedness, we have come to find that there are, in fact, pockets of “differentiated liquidity” across individual dark pools. There are some dark pools that consistently have higher market share in a given name, sector, or subset of stocks as we measure trading over time. There are various reasons we can point to for this differentiation – trader workflows, strong coverage of a sector at a firm, market making activities, or client types. However, the implications are the same – you will have a better chance of finding a fill in certain stocks if you direct order flow to venues with differentiated liquidity in that name. While many firms continue to route all orders to dark pools based on a single generic routing table or overall ATS market share, we have come to believe that a more nuanced stock- or sector-specific approach to dark routing can lead to an improved experience in dark pools for clients. We have implemented this market structure research directly into our trading products and are excited to roll out this new dark liquidity heat-mapping routing logic to clients.

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