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(BN) Dark Pool U.S. Market Share Rose in September

Wednesday, November 10, 2010

The proportion of U.S. stocks trading in dark pools, or private venues that don’t display prices in advance, rose to a record in September, helped by declining market volatility, according to Rosenblatt Securities Inc.
      Volume reached 12.1 percent of overall trading in September, up from 11.3 percent in August, an Oct. 22 report from the New York-based broker said. In Europe, 13 dark pools Rosenblatt tracks accounted for 2.19 percent of the total value
traded, down from 2.24 percent the prior month, Justin Schack and Joe Gawronski wrote in a separate study dated Oct. 28.
     “Non-displayed markets clearly benefited from a significant decline in volatility,” Schack and Gawronski wrote, as narrowing price swings lowered demand for immediate executions on public exchanges. The drop spurred market-share
gains in all but 4 of the 16 U.S. venues Rosenblatt tracks, accounting for 90 percent of volume in the alternative systems.
     The gain in the U.S. came as regulators consider changes to American equity markets including more than 30 dark pools that don’t display quotations or orders. NYSE Euronext and Nasdaq OMX Group Inc. executives have argued that nrestricted trading away from exchanges may hurt the ability of markets to gather enough buy and sell demand to produce fair prices. Exchanges compete with broker-operated dark pools, whose executions are based on prices established by the public markets.
     The Chicago Board Options Exchange Volatility Index, or VIX, averaged 22.5 in September, down 9 percent from its August level, according to data compiled by Bloomberg.

                        Differing Views

     Mary Schapiro, chairman of the Securities and Exchange Commission, said today in New York that exchanges and brokers operating dark pools are offering different views on how to change markets. While venues such as the New York Stock Exchange and Nasdaq favor “pulling liquidity back to the exchanges,” brokerages that handle trading for clients want to be able to transact in-house through dark pools, she said at a Securities Industry and Financial Markets Association conference.
     Credit Suisse Group AG’s Crossfinder remained the largest U.S. dark pool, followed by Sigma X, owned by New York-based Goldman Sachs Group Inc., the report said. Crossfinder and a venue operated by Chicago-based Getco LLC gained the most. Crossfinder traded 179 million shares in September, an increase of 18.6 percent from August, while Getco Execution Services traded 110 million shares, up 19.5 percent.

                            Sigma X

     Goldman’s Sigma X volume rose 1.8 percent in September. Knight Link, the fourth-largest venue that executed non-
displayed orders, declined 5.2 percent from the prior month. The system is operated by Knight Capital Group Inc., based in Jersey City, New Jersey. While dark pools double-count the buy and sell side of trades when reporting results, Rosenblatt’s data represents single-counted volume.
    In Europe Citi Match, operated by New York-based Citigroup Inc., was the largest, followed by Zurich-based Credit Suisse’s Crossfinder. Liquidnet Holdings Inc.’s dark pool, Instinet BlockMatch and Citi Match rose the most from August to
September. Liquidnet Holdings is based in New York. Instinet Europe is a subsidiary of New York-based Instinet Inc., which is owned by Nomura Holdings Inc. in Tokyo.
    European dark pools may account for as much as 2.93 percent of total value traded, Rosenblatt said. The figure comprises
Rosenblatt data and trading information about four broker-operated systems from London-based Markit Group Ltd. that aren’t included in the U.S. broker’s figures.  “The broker-operated algorithm-friendly pools still dominate the dark pool space,” Schack said. Independent pools such as Liquidnet and New York-based Pipeline Trading Systems LLC, which focus on larger executions for customers, don’t get as much volume. “This has moderated somewhat as volatility has decreased in the U.S., although broker pools remain dominant,” he said.

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