A new report from the Tabb Group finds that slow systems at dark pools may be costing pool participants. The study used trading data from The Boston Company Asset Management from July 2014 to May 2015 to examine midpoint peg orders, or orders that are set to execute at the midpoint of the national best bid and best offer (NBBO). Tabb found that in many instances, the midpoint peg orders were executing at a price equal to the opposite side of the NBBO or worse (for a buy order, executing at the best offer or higher).
The study explains that “[t]he least-effective pools believe that the midpoint is accurate because they are slow at obtaining, calculating, and or striking a midpoint price, when, in reality, the fast trader knows that the price is stale.” One pool in the study executed the orders at the opposite side of the NBBO in 24.7 percent of executions, and three pools in the study executed more than 5 percent of their orders at prices outside of the NBBO. The authors defined the problem as a “latency tax,” or “the cost of transacting in a pool due to infrastructure and processing lags, exclusive of latency arbitrage.”