(excerpted in part from Martin Reck, Electronic Intermediaries for Block Trading, in Robert A. Schwartz,
Reto Francioni and Bruce W. Weber, The Equity Trader Course, John Wiley & Sons, 2006)
Containing the cost of executing a large block order presents a major challenge to the equity trader.
An open limit order book offers only limited liquidity and a level of transparency that can reveal the
presence of a large order before it has been completely executed. To mitigate the costs that are thereby
incurred, a large order is typically sliced into smaller tranches and sent sequentially to the limit order
book over an extended period of time.
As an alternative facility for handling a large order, TraderEx offers a dark pool that can be used along
with the open limit order book. Patterned after Pipeline, The TraderEx dark pool determines prices and
matches orders using an algorithm that can give price improvement to pre-positioned limit orders.
A completely closed order book sits in the center. The book shows only if an order has been entered,
without revealing the side of the market (buy or sell) that the order is on. All orders sent to the dark
pool must equal or exceed a minimum size. All orders are hidden, and crossing orders are executed immediately
following price-time priority rules if multiple orders match.