US dark trading hits record, despite impending reforms

Trading in dark pools has continued to grow in the US according to the latest report from boutique brokerage Rosenblatt Securities, despite imminent intervention from regulators.
By None

Trading in dark pools has continued to grow in the US according to the latest report from boutique brokerage Rosenblatt Securities, despite imminent intervention from regulators.

The 17 non-displayed liquidity venues monitored in Rosenblatt’s monthly dark pool liquidity tracker traded 1.12 billion shares in April, a 21% increase on March’s total of 923.8 million.

Despite the spectre of increased regulation, US dark pools accounted for 11.46% of consolidated US equity volume in April, a second consecutive monthly record following March’s 11.13%.

Last October, the Securities and Exchange Commission (SEC) issued a three-point dark pool plan for increasing transparency in US dark pools. The proposal comprised requiring ‘actionable’ indications of interest to be published as quotes; lowering the level at which dark pools must make quotes public to 0.25% of a stock’s average daily traded volume from 5%; and forcing dark pools to report trading volumes individually on the consolidated tape. The SEC included an exemption to all three new rules for orders of $200,000 or more.

However, trading participants have indicated that identifying themselves individually in post-trade feeds may cause unnecessary information leakage, while others believe the $200,000 exemption for making quotes public will decrease the chance of executing small- and mid-cap securities in a market impact-free environment.

Although the comment period for market participants to respond to the proposed rulings ended on 22 February 2010, the SEC has not yet given a firm timetable for when the rules will be finalised.

The largest US dark pool in April was Credit Suisse’s Crossfinder, which traded 251 million shares, or 2.57% of total liquidity, in April, followed by market maker Knight Capital’s Knight Link, which grew by 29.84% in April to 1.65% of total consolidated US volume, overtaking Goldman Sachs’ SIGMA X dark pool.

Dark order types on exchange accounted for an additional 4.3% of dark liquidity, taking the total amount of dark trading in the US to 15.76%.

According to Rosenblatt, a slight month-on-month reduction in volatility was a significant factor in the ongoing growth of dark trading in the US.

“Once again, non-displayed venues gained market share during a month when volatility … declined,” said Justin Schack, director, Rosenblatt in ‘Let There Be Light’, the firm’s monthly commentary. “This continues a strong inverse correlation between volatility and dark pool market share that we have observed for more than two years, with the sole exception being the extreme, crisis-related volatility seen in late 2008 and early 2009.”

«