"It's really about exerting control, selecting the liquidity a broker wishes to engage with in order to achieve improved execution quality," explains Roman Ginis, the CEO of Imperative Execution, the parent company of IntelligentCross.
Dark pools earn their name because they conduct trades away from the "lit" public exchange to avoid order details leaking and causing adverse price movements before being executed. However, a downside is that anyone can access a pool, meaning firms inside are often unaware of their counterparties in trades. Private rooms offer a more discreet option.
Despite this, private rooms are gaining popularity among various market participants, such as broker-dealers, market makers, hedge funds, and asset managers. Private-room volumes at the Stamford-based ATS, IntelligentCross, now surpass the total trading activity of nine rival dark-pool operators.
The exact number of private rooms and their trading volumes remains unclear. While present private-room volumes are relatively low for alternative trading systems (ATS), the demand is growing fast as firms seek more control over their trading interactions and aim to execute individual orders more effectively.
A private room functions as a gated venue within a dark pool, providing exclusivity by specifying which participants can engage in trades. The privacy and exclusivity offered by private rooms appeal to parties looking to conduct large equity transactions without impacting market prices significantly.
Private rooms cater to various needs and preferences. For instance, CastleOak Securities, a minority-run brokerage in New York, utilizes a private room provided by ATS operator OneChronos to trade with similar businesses. The room, referred to as a "diversity pool," is exclusively populated by minority-operated brokerage firms.
Private rooms, also known as hosted pools, restricted-access rooms, ATS pools, or custom counterparty groups, are increasingly favored in today's high-speed market as a means for firms to level the playing field and avoid potential disadvantages.
While private rooms offer benefits and enhanced control to users, there are concerns regarding market transparency and fragmentation. Transactions within private rooms are often not segregated from overall dark pool activities, potentially distorting market depth data.
Regulatory bodies such as the Securities and Exchange Commission (SEC) have imposed disclosure requirements on dark pools, including details about private rooms available within the platform. However, these requirements do not mandate the disclosure of the number of private rooms or the identities of participants within them.
Private rooms are still in a phase of growth and optimization for many brokers, representing a small percentage of total trading volumes on platforms like IntelligentCross. However, as demand for improved execution quality persists, private rooms are expected to see increased utilization and further development in the future.