While conventional wisdom suggests that the US equity market is already too fragmented, making consolidation inevitable, more trading venues are on the way, according to Larry Tabb, founder and CEO of research and consulting firm TABB Group.
Speaking at a webinar hosted by technology firm SunGard on Wednesday, Tabb acknowledged that many expected the US equities market to consolidate, but he said, “For the past year or two, we have thought the opposite – that we would see more fragmentation.”
Tabb estimated that there are currently around 50 dark pools and alternative trading systems in the US equities market, with varying degrees of liquidity. “I know of another three or four that are being built now, and I’m sure I don’t know about all of them,” he said, adding that the number of alternative platforms could ultimately swell to 65-70.
One driver of growth is the revenue benefits of internal dark pools to broker-dealers, which can earn commission on both sides of the trade if they execute client and proprietary flow internally.
Despite predicting an increase in alternative trading venues, Tabb does not expect a big shift in order flow from displayed to non-displayed venues. Noting that current dark trading levels account for 10-11% of all matched flow in the US, he claimed, “Dark trading won’t be more than 10-15% of the total.”
But the growing number of trading venues would put a strain on trading technologies. “The problem is going to the right venues,” said Tabb. “You are going to need good smart order routing and algorithms to figure that out.”
Tabb also noted the US Securities and Exchanges Commission’s concerns that dark pools currently do not have to identify themselves in post-trade data feeds, making it tough to track volumes. “It’d very difficult to monitor what happens in dark pools,” said Tabb. “Everyone wants to represent their numbers in a way that makes them look good.”