In Australia, Liquidnet has 48 participants, called members, who contributed to the $2 billion in average daily domestic-stock volume maintained by the dark pool in the first quarter of 2012. During this period, the average trade size, or “crossing”, was about $1.2 million, compared to the average ASX trade of $7094, according to Liquidnet.

Investors execute large trades in dark venues to prevent shareholders of the same stock in lit markets from suppressing bid offers or increasing sale prices. This “information leakage” incurs “market impact”, or expensive trading costs, for the investor. “The greatest concern of asset owners is how to undertake large equity transitions without information leaking to the market,” says James Chatfield, a director at Liquidnet in Sydney.

“Implicit trading costs associated with stock prices moving against the trade can be far greater than the explicit broking costs negotiated with transition managers,” he says.

“Transition managers need to be able to trade in all available venues that offer liquidity depth, mid-point pricing and information protection.”

Transition managers’ searches for liquidity are increasingly being conducted through smart-order routing algorithms, Jackett-Simpson says. Citi seeks liquidity through its dark pool, CitiMatch, stock exchanges and Liquidnet. “You need quality flow, large flow and systems to capitalise on this.” CitiMatch has completed about 3.5 million crossings since it began trading in 2006, delivering an average spread saving of about 73 per cent. Its crossing rate, 25 per cent, shows the proportion of orders traded, or “filled”, through the dark pool.

Dark pools are useful for transitions involving small-cap stocks that are less liquid, or traded less frequently. “As you move to a stock that’s less liquid, there is a general informationleakage issue,” Jackett-Simpson says. “You don’t want everyone to know how much size you’ve got.”

Dark pools with poor security can be vulnerable to high-frequency traders who send small orders to gauge how much volume a pool has in a particular stock. They seek information about which investors aim to sell what quantities of stocks. “They try to game the flow,” Jackett- Simpson says. Investors should be aware of these risks.

The size of the Australian market – the market capitalisation of all companies on the ASX is about $1.3 trillion – means that it’s unlikely to become as fragmented as larger markets, such as the US, where the S&P500 has a total market capitalisation of US$5.58 trillion.

“You can’t see a way that Australia can support more than two or three exchanges,” Hammerton says. “There’s not enough liquidity.”