Dark Pools Win Record Stock Volume as NYSE Trading Slows to 1990s Levels
Private trading venues known as dark pools accounted for more U.S. equity trading than ever in January as volume fell on the biggest exchanges.
Dark pools matched 935 million shares a day, or 13.5 percent of stock changing hands, compared with 1.02 billion, or 12.4 percent, a year earlier, according to data compiled by Rosenblatt Securities Inc. That topped the prior market-share record of 13.2 percent in April. The firm tracks transactions on 18 dark pools, or venues that don’t publish bids and offers and are used by fund managers and brokers trying to limit the impact of their trades on prices.
Dark pools got a larger piece of a shrinking pie. Trading at the New York Stock Exchange has declined to the lowest level since 1999, with the average volume over the 50 days ended Feb. 28 slowing to 789.5 million shares, according to data compiled by Bloomberg. The 50-day average for all exchange-listed securities, including transactions on dark pools, fell to 6.62 billion shares on Feb. 28, the lowest in Bloomberg data going back to June 2008.
“January was a slightly better institutional month than the broader market volume might imply,” Jamie Selway, head of liquidity management at New York-based Investment Technology Group Inc. (ITG), said in a phone interview. His firm runs dark pools. “Modestly better institutional volume and low volatility adds up to good things for institutionally focused dark pools.”
Price swings have narrowed this year. The Chicago Board Options Exchange Volatility Index (VIX), a gauge of expected fluctuations derived from Standard & Poor’s 500 Index calls and puts, has fallen 62 percent since reaching a 2 1/2-year high in August. The measure has decreased 21 percent to 18.43 this year and is 10 percent below its average since inception of 20.56.
The rise of dark pools has reflected the fragmentation of U.S. equity markets following rules adopted in the last decade to limit the dominance of NYSE Euronext and Nasdaq OMX Group Inc. Share transactions are split among 13 stock exchanges, several alternative venues and as many as 50 private platforms including Credit Suisse Group AG (CSGN)’s Crossfinder, the biggest, which averaged 132.5 million shares a day in January, or 1.9 percent of the average daily equities volume, according to the report from New York-based Rosenblatt.
Crossfinder is followed by Goldman Sachs Group Inc. (GS)’s Sigma X with 1.6 percent of U.S. equities volume in January and Knight Capital Group Inc. (KCG)’s Knight Link system at 1.4 percent, the Rosenblatt report said. Barclays Plc (BARC) and Getco LLC also have more than 1 percent each.
Increased volume from mutual funds in January spurred more trading in alternative venues, according to Tim Mahoney, chief executive officer of BIDS Trading LP, a dark-pool operator owned by 12 investors including 10 brokers, NYSE Euronext (NYX) and the estate of Lehman Brothers Holdings Inc. He said trading in February is likely to be similar to January’s results, based on volume his firm sees.
“It was an investor’s marketplace,” Mahoney said. “We saw long-term money going into mutual funds and traditional investors and that money flowed into the market,” he said. “Low volatility favors the fundamental investor.”
Liquidnet Holdings Inc.’s two venues saw the biggest increase in trading volume in January versus December, with the number of shares handled almost doubling for both, according to Rosenblatt.
Deutsche Bank AG’s dark pool, called Super X, had a 0.7 percent market share in January after shares matched surged more than 6,200 percent from a year earlier to 50.7 million a day, the report said.
European and Canadian dark pools also had record trading in January, Rosenblatt said. The 17 European pools tracked by the broker had 4.6 percent of trading, compared with 3.8 percent in December and the previous record of 4.2 percent in October, the brokerage said.
Canadian venues that match equity orders without showing prices in advance reached a record high of 4.45 percent in January. The biggest are ITG’s MatchNow and Alpha Group’s Alpha IntraSpread, Rosenblatt said.
Lower volatility means the cost of taking liquidity, or executing against bids or offers, may be higher compared with trading in a dark pool at the midpoint of the best available prices, Selway said. The share of institutional trading in dark pools tends to rise when volatility is lower, he said.
“Waiting for serendipity in a dark pool doesn’t make sense when volatility or correlations are very high,” he said.
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