Five Expert Lessons We Learned From Peer-To-Peer Equity Traders

Launching something new is rather like diving off a cliff – so it’s quite helpful to know where the rocks beneath the surface are hiding. And the best people to ask are those who’ve made that exhilarating plunge before.

The Loop team have spent decades building pioneering technology for capital markets, but even with this brilliant starting knowledge base, I still wanted more information. We spent considerable time and effort investigating what works and what doesn’t in the Peer-To-Peer dark liquidity pools operating in other capital markets before building our own, LoopFX, for the large scale institutional foreign currency exchange sector. FX markets have historically not operated with dark pools, but they’ve been a common feature of Equities markets for 10 years.

So although the team and I canvassed opinion from FX practitioners, it was the Equities traders who had the benefit of a decade working with this model and it was their advice that is helping us to stay clear of dangerous objects lurking beneath the surface. The advice I took could – and does – fill many pages of notebooks. But in carefully condensing down 75 very private conversations with practitioners from over 30 firms, these are the five key lessons I learned from studying dark pools in other markets…

For a dark pool to work there needs to be a reasonable number of participants – a handful will not suffice. For enough to enter, it’s essential you are able to interact seamlessly with their existing systems. They will not be motivated to adjust their workflows to accommodate a new system.

“Your dark pool has to be a skeleton key that fits every lock,” I was advised by one Equities veteran. “You’re deluding ourselves if you imagine Asset Managers will make new locks just for you.”

“Nobody will even trial you unless you can be used without cost or risk,” an executive from a highly successful Equities Peer-To-Peer platform executive told me.

So we had to ensure in our build that an order placed in our pool will not block the same order looking for an execution elsewhere or carry a penalty for anyone looking for a match. The advice couldn’t have been clearer: to look in a dark pool should carry no cost, no information leakage risk and not block simultaneous exploration elsewhere. There has to be zero jeopardy for practitioners looking for a match and good chance of finding an excellent way to fulfil an order.

Any attempt to re-order the balance of power in a market is, in the words of one senior executive “absolutely doomed from birth”. This powerful lesson helped us realise that any attempt to cut banks out of the trading process would be both undesirable and set up to fail. Although a new way of working in the FX realm, we are scrupulous in respecting the vital role banks play in the ecosystem. We are facilitating the existing market structure not disrupting it.

“Do your legal homework,” smiled an experienced VP.

The regulations surrounding FX trading are complex. We realised very early on in our development process we would need to fit within regulatory guidelines and ensure no one would be required to change their legal documentation with market participants to work with us.

Those who have previous experience in Dark Pools want a matching venue to limit ‘gaming’ opportunities with a clear set of rules designed to police behaviour. Experienced Dark Pool users told us they need to be able to set their own match parameters. These include controls like a minimum match %, choice of eligible common Banks to match against or time to search, anything that provides comfort and flexibility for diverse users and market conditions.

I’d love to lift the veil of anonymity from the many brilliant executives who generously shared their time with me. But I can’t break their confidence. Suffice to say that LoopFX would not be making the progress it is without their wisdom. You know who you are: thank you.