HOW IT WORKS “Gaming” It uses what is known as IOIs and IOCs. IOI stands for indications of interest, they are often used to determine if there is available liquidity that can be crossed with your order. For example, if you enter a buy order for 100,000 shares of Stock ABC into Dark Pool A, Dark Pool A may send indications of interest to Dark Pools B and C to tell them it is interested is trading stock ABC, if either pool has a crossable order. Typically Dark Pool A will not disclose whether it is a buyer or a seller or how many shares are available to buy or sell. IOI's are typically used for large non-marketable orders.
IOC's stand for Immediate or Cancel. IOCs are used for small marketable orders. So, for example, if you want to buy 1,000 shares of stock ABC and you send the order to Dark Pool A, if there is not a crossable order in Dark Pool A, it may send an IOC to buy 1,000 shares of stock ABC to Dark Pools B and C. If Dark Pools B or C have a crossable order, they will execute the IOC and the customer will get a fill, if not the order will be canceled back to Dark Pool A and it will route this order to a public market for a fill.
In terms of gaming, although the use of IOC's disseminates more information (stock, size and side), it is much less susceptible to gaming because one, the orders tend to be small so the information is less useful to any gamer, and two, within milliseconds of the dark pool rejecting the order, it will be routed to a public venue for execution and not much is going to happen in that time.
The IOI on the other hand lends itself more to gaming, if I am dark pool B or C and dark pool flashes me an IOI in stock ABC, I have a pretty good idea that there is a large buyer or seller in the market and that their actions will move the price up or down over time. If I am nefarious I could pretend that I am a seller of 500 shares, if Dark Pool A fills me, then I will know there is a big buyer in the market and I could start buying in anticipation that the big buyer will push the price up. This will hurt the buyer because he will end up paying more for his purchases since my actions in and of themselves drive up the price. On the other hand, again if I am nefarious and pretend that I am a seller of 500 shares and Dark Pool A does not give me a fill, I have a pretty good idea there is a big seller out there and I can equally manipulate the situation to my advantage.
The SEC are now taking the view that “gaming” is illegal and have for sometime. They are now coming down with enforcement on the brokers who enact “gaming positions”.
As Always BE WISE BE SAFE
Posted By: DAVID JOHNSON
Tuesday, September 28th 2010 at 12:11AM
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