Tabb Group Sees A “Plateau” In Dark Pool Growth

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The dramatic rise in dark pool trading for stocks may plateau, according to a Tabb Group senior analyst.  The finding comes as the consulting company delivered their monthly report on equity trading, which showed a slight decline in dark pool trading in February.

Plateau expected

“Over the last 6 years we have witnessed a significant increase in volume on (non-exchange) dark Alternative Trading Systems (ATSs), but this could reach a plateau,” said Sayena Mostowfi, senior analyst in equities at Tabb Group. “The firms that had plans to create alternative trading systems have already done so,” thus the volume rise in dark pool trading could slow.

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Tabb Group noted that reported volume in alternative trading platforms dropped to 874 million shares from 915 million shares in January. This came as overall industry average daily volume increased to 7 billion shares in February, up slightly from 6.9 billion in January. The top dark pools, who voluntarily report their volume were respectively: Barclays PLC (NYSE:BCS) (LON:BARC), UBS AG (NYSE:UBS), Morgan Stanley (NYSE:MS), Citadel and Goldman Sachs Group Inc (NYSE:GS).  However, Mostowfi noted that some ATSs did not report their volume and the list could change slightly.  A new FINRA rule requiring alternative trading systems to report volume, due to take hold May 12, would be beneficial for the market, Mostowfi said. The new rule will not apply to single dealer platforms.

Tabb exchange Dark pool

Dark pool growth relation to stock market volatility

Mostowfi noted that when stock market volatility increases, trading volume on dark ATSs decreases. “Traders are sometimes concerned about resting their orders (off-exchange) and missing a market move.”  She noted that during “normal” market conditions, some institutional investors prefer dark pools because of counterparty trust. “Some investors perceive if they have a large order, and execute a small portion of that order on a public exchange, other market participates can pick up on the signals there is a large order coming that will impact market prices and trade accordingly,” she said.

Tabb Stock distribution dark pool

The dark pools with over 50% of their reported volume in large cap stocks included ConvergEx Millennium, Deutsche Bank Super X, Goldman Sachs Sigma X, Instinet CBX & VWAP Cross and Knight Match.  The largest mid-cap exchanges by percentage of volume were Liquidnet Negotiated & H20 marketplaces.

In terms of large block trades, the leading exchanges were Liquidnet Negotiated & H20 platforms followed by Instinet VWAPX and BIDS.

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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