How to detect ping orders?

There is nothing wrong in placing small orders in a dark pool. The problem is when the underlying intent is not really to make such transaction but to obtain information about hidden orders that may be resting in the said venue. In practice, for a small order to be considered a ping order, there has to be evidence that the market participant benefited (or tried to benefit) from the obtained information, by trading (or trying to trade) subsequently at more favorable conditions.

For this purpose, an alert can be set to notify whether the following pattern occurs:

• Placement, by market participant A, of a small sell (buy) order in the dark pool that is immediately executed;
• Upward (downward) price movement in the respective light market, driven by trading actions (such as spoofing) performed by market participant A;
• Placement, by market participant A, of a large sell (buy) order in the dark pool that is immediately executed at a higher (lower) price than the one recorded in the small quantity transaction.

In a less automated and/or less informative environment, which alternatively will demand additional trade surveillance analytical efforts, the alert can be set to notify whether the following pattern occurs:

• Placement of a small sell (buy) order in the dark pool that is immediately executed;
• Upward (downward) price movement in the respective light market;
• Placement of a large sell (buy) order in the dark pool that is immediately executed at a higher (lower) price than the one recorded in the small quantity transaction.

In addition, the trade surveillance analyst should be aware of which market participants frequently (in absolute and relative terms) place small orders in a dark pool. Is not that by doing so they are manipulating the market. However, being dark pool venues conceived to execute large transactions, the fact that one market participant is frequently placing small orders in such a venue may be indicative of non-genuine intentions.