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.”