The same "liquidity providers" that have been discussed previously in Zero Hedge, are also in dark pools to make sure trading costs are shifted from observable to less observable or not directly observable. Observable trading costs are the difference from VWAP, open price or arrival price + commission and spread costs. Less observable are bid/ask drift before a dark pool print. For example if I put an order to buy 100k shares of IBM to POSIT, UBS, or GS (especially the latter two where prop traders are more than happy to get right of first refusal on the bid/offer if they so desire) the stock might move up about 10 cents (not an actual observation) and than print my block. Within 15 minutes after the print, the stock is back to being 10 to 15 cents lower. Example of non-observable cost is P&L reversion. In the IBM example, I put an order to buy 100k shares to POSIT. The stock does whatever it would have done anyway and within 30 minutes my block is printed during regular crossing session. In the next trading day, the first 30 minute VWAP will be about 10 to 15 cents lower. So if I buy IBM on POSIT on a regular basis, on average, I can pay 10-15 cents less just by buying the next day on open market. If we factor in higher crossing networks commissions (mostly invisible, charged via net markups), the promise of a free lunch become the reality of very expensive lunch.
Obviously, mutual and pension fund traders have high alpha, they need access to expensive liquidity provided by GS principal bids desk, crossing networks and other means where trading costs are allocated via the "back door" and do not affect buy side traders' bonus scheme payouts. And obviously, teachers, firefighters and the police along with 401(k) investors are on the receiving end. What's new?
In essence, dark pools do not facilitate liquidity provisions over and above what the high-vol players provide, and one can argue, do not lower transaction costs at all - these are merely contraptions that are designed to fool naive traders that immediate vol spikes can be avoided on large block trades, however the cost in the long run is prohibitive enough to where the entire model start cannibalizing itself. Potentially the only benefit from the pools is as an opaque conduit for "not so legitimate" transactions.
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