Mike Plunkett

Brokerages that have started crossing networks in the past year are likely to form multiple partnerships to connect liquidity pools, trading executives said. The buyside has increasingly been complaining about having to hunt harder for liquidity in the maze of the 30-odd dark pools that have sprung up. With cost pressures coming from fund boards, buy-side firms can't afford to increase the number of brokers they use to ensure they dip into every dark pool, and buy-side firms have been paring down on the firms they use.

Some deals have already been struck this year to link dark pools. Credit Suisse and Instinet have provided each other with algo access to their respective dark pools (WSL, 10/27). NYFIX Millennium has begun connecting with several dark pools via indication of interest messaging, and ITG has formed Block Alert with Merrill Lynch. "The forward-thinking [firms and ATSs] are looking to negotiate reciprocal arrangements," said a trading exec at a bulge bracket. "Typically both will agree to ping each other to look for liquidity."

A few linkages will not be good enough, said Mike Plunkett, president of Instinet North America. "For the process to be solved there has to be many more of these partnerships," he said. Plunkett said it is not possible to stay on top of the liquidity in all the dark pools. "It is OK with five, six or even seven [dark pools], but when you have 30 to 40, you can't do it," he said. Another trading executive said the market fragmentation spurred on by dark pools is a step back. "We are regressing, as far as market structure, rather than moving forward," he said.