High levels of off-exchange trading recorded in US equities last month reflects a decrease in the amount of buy-side commission available for execution, according to financial research firm TABB Group.
The latest data on trading volumes shows that 32.96% of US equity trading was done on a non-displayed basis in March, more than double the 15% that was attributed to dark pools and internalisation in 2008.
TABB Group founder and CEO Larry Tabb said that most recent conversations with buy-side traders found that managing cost had become critical as commissions and the fees associated with execution come into sharp focus.
“While the buy side wants to allocate more of their commission dollars to research, corporate access, and underwriting calendar, traders are allocating less of their commission wallet to execution,” said Tabb. “This puts pressure on trading desks to reduce internal expenses, a significant portion of which are exchange fees. If trading desks can match orders internally, then they don’t need to pay exchanges for execution.”
Tabb added that the low volume environment is helping to push traders into the dark quicker, as cost, matching rate and trading opportunity impact where the buy-side direct their order flow.
Cheyenne Morgan, research analyst and manager of TABB LiquidityMatrix, said that it was important not to restrict the dark debate to non-displayed trading venues, adding that while such venues account for 13% of US equities volume, the balance of off-exchange trading is executed via internalisation – brokers matching orders internally on their trading desk.
“With more and more trading moving into off-exchange, it will be interesting to see if the regulator takes a closer look at this space,” said Morgan.
As off-exchange volumes continued to rise, Tabb said the jury was still out as to whether or not this was a good thing.
“While some traders are upset their orders are being surreptitiously spammed around the market and others complain about fleeting quotes and un-executable liquidity, there’s a core group of traders who view higher dark execution rates and lower commission levels as outweighing the information leakage messaging barrage,” he said. “It’s also a fair point to say, if execution was that terrible, wouldn’t traders stop sending orders to the more egregious spammers?”