Dark Pool Trading System

Dark Pool Trading System

Dark Pool Trading system is an internal system, intended to trade stocks privately with the objective of liquidating large stock positions at lower costs. Many of these systems have evolved into alternative trading systems ATS (Alternative Trading Systems), where liquidity is reported to reside, but cannot be seen with the naked eye. The sources of dark liquidity include, ATS, crossing networks and other dark pools, and unlike traditional liquidity sources such as stock exchanges, trade on these systems and draw their prices from the market, and in most cases do not have any market impact. Thus they may not print their trade details back to the market – essentially because regulations do not currently require it.

In the recent past, the financial markets have undergone lot of changes in terms of trading strategies, new product innovations, the regulatory requirements, and a growth in technology have led to increase in trading volumes. Along with the volumes on the exchanges, the trading volumes of the dark pool trading systems are growing every day. Today, there are more than 40 dark pool systems that are operational in US market.

The Dark Pool Trading systems, mainly used by the institutional traders who trade in large volumes, help institutional investors in getting more liquidity and less transaction cost, strategies are not exposed to the markets- less transparency, fund manager strategies are best implemented with the use of algorithmic trading whereby best execution is possible. In spite of these benefits, few issues like inadequate price transparency, regulatory requirements and uniform information access to all kinds of investors are still debatable.

Considering the complexity of these trading systems in terms of technology, speed, functionalities and system performance, it is very important that the functional testing along with the gateways testing and performance testing need to be done.

Testing Approaches

Functional Testing:

As these applications are multi product, multi segment and multi user, an end to end functionality testing of the application is required, wherein each functionality needs to be identified, smoke and unit test cases of each needs to be developed. As these trading systems are linked and interdependent, authoring integrations test cases is needed. To ensure that the existing functionalities are not affected, regression testing on a continuous basis is needed.

Gateways (Interface) Testing:

Dark Pool Trading systems communicate with various internal and external systems and it is very important that the communication between these interfaces is very fast with out any data loss. As these systems are mainly used by the institutional traders and bulk executions occur in a short span of time, interface testing plays a crucial role in validating the data flow.

Testing of the interfaces basically ensures the existence of communication between the client and server. The validation of backend messages is done by connecting to the various FIX gateways like DMA, IDCE, etc. The various message tags are also validated for the protocols like FIX (Financial Information Exchange), SIP (Securities Information Processing) and ITS (Inter market Trading System) in the respective gateways.

So all the gateway testing is to be done using any of the protocols (usually FIX is used for trading applications) to ensure smooth flow of communication between various gate ways associated with the dark pool trading systems.

Performance Testing:

The dark pool trading systems are used mainly by the large investors whose volumes are very high. They want their orders to be executed as and when the opportunity exists for their strategy implementation. So trading application performance plays a crucial role and this needs to be tested using performance testing tools. These applications are accessed simultaneously by multiple users, hence the load testing of the same need to be done before implementing them in the production environment.

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