Monday, July 14, 2008

Latest jargon on the global stock markets

Heard of things like 'dark pools' 'smart routers' and 'algorithmic trading'?

Dark pools, to put it simply, are essentially trading platforms and exchanges that match block institutional orders, bypassing the main exchanges completely in off-market deals, and don’t publish stock quotes. The geeky jargon in the circuit is primarily because it’s been made possible by increasingly sophisticated technology like algorithmic trading tools. They guarantee absolute anonymity and secrecy to buy-side traders worried about revealing their strategies, accesses available liquidity outside the exchanges, and is only reported to the light side post-trade. It is, of course, all intensely regulated and painstakingly legal — dark pools have taken off in Europe only after the introduction of MiFID, which discourages internalisation of trades, and regulation NMS in the US. A consortium of major banks, including Citigroup, Goldman Sachs, Deutsche Bank, Merrill Lynch, UBS, Morgan Stanley and Credit Suisse, are due to launch Turqoise, a pan-European dark pool trading platform come September.

In electronic financial markets, algorithmic trading, also known as algo, automated, black-box, or robo trading, is the use of computer programs for entering trading orders with the computer algorithm deciding on certain aspects of the order such as the timing, price, or even the final quantity of the order. It is widely used by hedge funds, pension funds, mutual funds, and other institutional traders to divide up a large trade into several smaller trades in order to manage market impact, opportunity cost, and risk. It is also used by hedge funds and similar traders to make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information. Algorithmic trading, says one study, will account for more than 50% of all shares that change hands in the US by 2010.

Smart order routers, which most traders now use as a given, do exactly what the name suggests, scan multiple options and sources of liquidity and routes your order through to the best price.

Dark algorithms allow disguised orders to be matched electronically without going through the Big Board, or letting any-one else know what you’re up to.