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The Twilight Zone

I came across the term 'Twilight Pool' for the first time this week. The basic idea is that it is essentially a dark pool that lights up certain pieces of information, or at certain times, in order to provide users with some idea of what is or isn’t lurking there. The advantage is that it enables participants to see if the type of liquidity they're seeking (either in terms of name or size) is likely to be in that pool. Obvious applications would be in the new-fangled SEF zone where everyone is scratching their heads wondering how and where illiquid contracts are going to trade. This is even more relevant if the lighting can be customised according to who is looking. In this way the prices can be 'painted' to reflect, for example, the credit status of a particular counterparty. Another application might be with the broker crossing networks that MiFID is looking to make more transparent with its proposed 4% and 8% dark trading rules. Either way, it proves yet again how markets will always be able to innovate faster than regulators can pass laws.

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Comments: (1)

A Finextra member
A Finextra member 06 February, 2014, 13:52Be the first to give this comment the thumbs up 0 likes

Steve, you're absolutely right in that innovation is the key here (and in fact you've come up with a couple of use cases that we hadn't even considered yet!)

We're just scratching the surface here. We're seeing the initial implementation of twilight pool functionality where venues are revealing the BBO for a limited time in the beginning of a session before moving to twilight mode. We're also running twilight pool heat maps appearing with colour coding to reveal activity such as better bids, offers and matching, for example.

But there is no reason why this kind of functionality can't be extended to address the typed of situation you've highlighted. Regulation permitting of course ;) 

Thanks
Peter Fredriksson