Dark pool share volume reporting needs to be standardised according to Cheyenne Morgan, an analyst at TABB Group.

The debate over flash orders has raised the question again about dark pool volume and makes action by regulators a near certainty, said Morgan.

At present GAAP requires publicly-traded companies to follow certain accounting rules when presenting financial statements so investors can reasonably compare equity values although reporting standards are not formalised. Better dark pool trade reporting with common standards would go a long way toward raising the level of investor confidence in and attractiveness of these alternative execution venues that are an intrinsic part of any execution strategy, wrote Morgan in a report on the subject.

One of the primary sources of confusion when reporting trades executed in a dark pool is whether to single-count or double-count matched share volume. Initially double counting was the standard among dark pools. Now there are several dark pools that have chosen to single count their volumes. This has caused some confusion among traders trying to compare volumes across the various venues.

Choosing one standard over another is one step toward clarity, noted Morgan. She also advocated further disclosure on trades matched within each venue. The major areas of confusion are over the different forms of three types of liquidity: resting liquidity where number of shares matched within the venue against orders that were resting within that venue at the time the order was received (natural liquidity); solicited liquidity when the number of shares matched within the venue against orders solicited from outside the venue after the order was received; and routed liquidity when the number of shares routed out to another venue and executed at that venue.

Segmenting order flow using these categories would create a dark pool blueprint that exposes the architecture of each destination and can help guide liquidity seekers to the most appropriate venue.

In addition to classifying liquidity types, each pool would also need to divulge the average size of a trade and the breakdown of share volume by determining where liquidity is most likely to reside at any given time. This helps the pre-trade execution decision and helps the dark pool by potentially attracting liquidity more likely to result in a match.

Monthly reporting will need to be inexplicit to prevent any type of undesired information leakage. Dark pools may also want to consider providing a high level breakdown of their participant base, suggested Morgan.

TABB Group supports, and tries to facilitate, a clearer post-trade reporting structure.

In an attempt to provide more comprehensive information on the various liquidity pools, TABB Group has launched a monthly LiquidityMatrix Report. This publication captures volume and pricing information on US exchanges, electronic communication networks (ECNs), dark pools and crossing networks.