He says investors seek dark pools to limit market impact on big trades. Brokerage commissions are comparatively small components – about 20 per cent – of trading costs, outside of which the gamut of other costs on open markets average out at 55 basis points because of information leakage. This makes dark pools a better place to execute large small-cap trades. “You don’t want to show your hand,” Corcoran says, “because they can be so volatile in their trading profile, and the spreads offered so wide”.  Block trades of medium- and small-cap stocks have been Liquidnet’s main order flow in Australia, Zilioli says, because clients often put large-cap crossings through brokers to pay them for research. “It’s that trading dilemma: how do you balance best-execution versus paying your bills?” NEW KIDS ON THE BLOCK To date, investors in Australia have only been offered one type of dark pool: the broker-crossing network.

There are other varieties available in more fragmented markets, says Steve Grob, global head of strategy at UK trading data and solutions provider Fidessa. Some publish post-trade data and are known as ‘non-discretionary’ venues. Grob, who was in Australia in November to speak to brokers and institutional investors about the impacts of fragmentation, says the launch of new dark pools is only one dimension of the change the domestic trading industry is experiencing. Electronic trading venue Chi-X, slated to enter the market in the first quarter of 2011, has become the first major challenger to the ASX’s long-held monopoly.  “New venues want to convince you their business models are the future; primary markets want to convince you they have woken up and adapted,” Grob says.

One of the major drivers of market fragmentation in Europe, and part of the force of change in Australia, are high-frequency traders, whose strategies involve shifting securities among different venues to exploit available liquidity and execution pricing.  Fragmentation forces investors to “reconstitute” their view of the market, Grob says. Seeking better deals, they must weigh up trading options at different venues, and when it comes to block trades, they must announce their interests to one or more of these networks. Despite providing the opportunity to access better and cheaper liquidity, Grob says this wide range of options can be problematic. “If you ask the buy-side in Europe if they are getting a better deal, they say either ‘No’ or ‘I don’t know’.  “There is a level of frustration on the buy-side. Big funds want to trade large blocks. That’s got harder the more dark pools there are. You feel like you’ve got to visit more. And you’ve got no idea until you get there if it’s a wasted journey. And if you get partly filled on one [trade], do you stop there or do you continue on?”  He says the pool-of-pool approach to dark liquidity is “symptomatic of everyone trying to get to the front of the queue for order flow”.