Off-Exchange Volume Spikes to Record Levels
January 29, 2013
Off-exchange trading appears to be spiking at the start of the year.
On Monday, 2.4 billion shares were traded on dark pools, broker pools and other “non-exchange” venues, according to BATS Global Markets data that relies on the Trade Reporting Facility of the Financial Industry Regulatory Authority. That amounted to 38.9% of the 6.3 billion shares traded on all equities venues, including public exchanges.
That meant record or near-record trading occurred on each of the three major tapes, according to research compiled by NYSE Euronext.
On Tape A, which covers trading in stocks listed on the New York Stock Exchange, 1.3 billion out of 3.4 billion shares, or 37.4% of all trading, took place off-exchange, according to the BATS data.
On Tape B, which covers exchange-traded funds on NYSE Arca as well as trading on NYSE Amex and regional exchanges, the off-exchange share was 38.5%. And, on Tape C, which covers trades on Nasdaq-listed stocks, the off-exchange share was 41.5%.
That consolidated tape data indicates a significant surge in off-exchange trading. As recently as October, Credit Suisse pegged the off-exchange share of trading at 33.2% and noted that “the percentage of volume executed off-exchange has been remarkably constant over the past five years.’’
The Tabb Group, an industry consulting firm, also put the off-exchange share of equities trading at 33%, for all of 2012, in a “U.S. Equities Market: 2013 State of the Industry” report issued this month.
But off-exchange trading tends to go up when markets are calm, said Dan Mathisson, the Head of U.S. Equity Trading at Credit Suisse.
“We always see off-exchange trading grow in low volatility months,’’ Mathisson said, “and then as soon as volatility spikes, volume migrates back to the exchanges,’’ such as when Standard & Poor’s downgraded U.S. debt in August 2011.
The Chicago Board Options Exchange’s Volatility Index reached a post-credit-crisis low of 12.3 on January 23 and Tuesday was at 13.3. At the height of the crisis, in October 2008, this so-called “fear index” that projects market swings for the next 30 days exceeded 89.
“With volatility so low,” Mathisson said, a surge in off-exchange trading “is pretty normal.’’
The spike, though, is not a one-day phenomenon, according to NYSE Euronext’s tallies of the data reported to FINRA.
In the first 20 trading days of 2013, five of the top 10 days for off-exchange trading on Tape A have been recorded. This includes three out of the top four: January 23, at 37.9%, January 9 at 37.5% and January 28 at 37.3%. The fourth? A month ago, Dec. 18.
On Tape B, six of the top 10 days for off-exchange trading have occurred in the first month of the year (see chart). The highest, to date: January 28, at 38.5%.
And on Tape C, Monday’s trading of 813.9 million shares off-exchange was the second biggest day, in share of all trading, for Nasdaq-listed stocks.
“We think the data is consistent with previous points we’ve made about the widening gap in trading between exchange and non-exchange venues,” said Richard Adamonis, senior vice president of communications at NYSE Euronext.
Credit Suisse pegged off-exchange trading on Monday at 37.5% of all stock trading. Mathisson said the month with the highest percentage-of off-exchange trading remains April 2010, at 39.5%.
The Securities and Exchange Commission, whose previous chairman cited the rise in off-exchange trading as a potential problem for public markets, declined to comment on the new-year spike.
In speaking to the Economic Club of New York in September 2010, however, then-chairman Mary L. Schapiro expressed concern about trading “in non-public, dark trading venues, such as dark pools and internalizing broker-dealers,” when the percentage reached 30 percent, up from 25 percent a year earlier.
Her comments came after she released a concept paper on market structure in January and the Flash Crash of May 6, where the share volume handled by off-exchange venues fell from 30 percent to 10 percent at the height of the 1,000-point plunge.
“Can we expect the public markets to handle nearly all the order flow in tough times, yet be bypassed routinely by a large volume in normal times?,’’ she asked.
Given the public markets’ “unique role in price discovery, we must be careful that the short-term advantages to individual traders from non-transparent trading does not undermine all investors in the long run,’’ she said.