Goldman, UBS and Morgan Stanley agree on dark pools

NEW YORK Tue May 20, 2008 1:04pm EDT

NEW YORK (Reuters) - Three major brokerage firms said on Tuesday they will start letting their clients access each other's "dark pools" -- trading systems which keep buyers and sellers anonymous -- to increase chances of trading orders being filled.

The arrangement among Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and UBS AG UBSN.VX pairs each in bilateral agreements that allow algorithmic trading orders from one to tap into the additional liquidity offered by the other's electronic trading network. These include Goldman Sachs' SIGMA X, Morgan Stanley's MS POOL and UBS' PIN ATS.

Dark pools now account for roughly 10 percent of equities trading in the United States, according to New York-based consultancy TABB Group.

They now number more than 40, up from a handful just two years ago, as investors seek to place larger orders without showing their hand to the market and risk adverse price movements.

Goldman Sachs' SIGMA X is the largest broker-run dark pool, averaging 140 million shares a day.

Though the companies will allow their rivals' to tap into their dark pools, the pools will remain separate entities and the firms are indifferent as to which pools their trades will tap as they seek to fill orders.

"The benefit to our clients is that we are reconnecting a marketplace that has been fragmented," said Andrew Silverman, Morgan Stanley's director of electronic trading.

Having to go to separate pools has been a point of contention for buy-side firms, said TABB director of research Adam Sussman.

While the three firms compete ferociously for trading business, they said they were teaming up because they were comfortable with the quality and confidentiality of each other's pools.

"It's a balancing act between finding liquidity and not advertising our clients' interests," said Will Sterling, UBS Electronic Trading's managing director. "Not a lot of pools out there fit that mold, but Goldman Sachs and Morgan Stanley do."

And while this deal brings together three of the largest brokers, they are keeping the door open others eventually.

"For now we are sticking to these two," said Goldman Sachs Electronic Trading's managing director Greg Tusar. "This isn't a final statement."

(Reporting by Phil Wahba, editing by Dave Zimmerman and Andre Grenon)