As Dark Pool Volume Soars, Citadel’s Sudden Transparency Interesting

As Dodd-Frank regulatory changes loom, trading volume in a leading “dark pool” exchange has recently exploded.

Average daily volume on Citadel Securities trading platform, Citadel Connect, which was 25 million daily contracts a year ago, saw on average 72 million contracts traded daily in January, according to a report from Reuters.

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Dark pool’s display of transparency interesting

Citadel’s display of transparency regarding its once secretive dark pool is interesting.  Until recently the dark pool didn’t even have a public name and was referred to as Citadel’s IOC (Immediate or Cancel) Gateway.  The fact that one of the largest market makers and liquidity providers for regulated exchanges is providing volume data on its dark pool activities for the first time is also interesting.

As previously reported in ValueWalk, dark pools are exchanges where typically large institutional firms trade stocks in a non-transparent, private environment.  In the article we noted that “twilight pools” are becoming trendy, where exchanges provide degrees of transparency into their activities yet still actively protect the privacy of traders.

Dark pool / retail order book integration

Citadel Securities, a unit of Chicago-based hedge fund Citadel LLC, is taking steps to integrate its dark pool with its traditional exchange market making operation.  Currently one of every four retail trades in the US are executed on the other side by Citadel. When it executes these trades on regulated exchanges, Citadel is now offering those retail trades to its dark pool as a method to hedge its exposure and increase liquidity.  This may in part explain the rise in volume on Citadel Connect.

NYSE CEO fights trade rebates

The volume on dark pools is significant, representing close to 40% of all volume traded, according to the report.  The 45 dark pools located around the world have been used by institutional investors as a method to trade in secret and reduce their transaction costs.  Many dark pools provide rebates to brokerage firms to trade, the subject of scorn from New York Stock Exchange CEO Jeff Sprecher, who is battling the dark pools for business clearing trades.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com