U.S. 'dark pool' trades up 50%

Trading of U.S. equities on "dark pools" has grown by almost a half in the past three years, according to CFA.

Story highlights

  • Trading of US equities on "dark pools" has grown by almost a half in three years
  • CFA survey: Off-exchange trading now account for nearly a third of total market volume
  • Shift from transparent public exchanges has highlighted growing concern among regulators

Trading of US equities on "dark pools" has grown by almost a half in the past three years to account for nearly a third of total market volume, according to research that underscores the challenge facing international regulators.

The shift from transparent public exchanges has highlighted growing concern among asset managers and global regulators about off-exchange trading, where prices are reported only after deals are executed.

Such venues allow investors to trade large blocks of shares anonymously, with prices posted publicly only after trades are done.

They have grown popular with asset managers as they minimise the risk of the market moving against them when executing a large order, or of seeing their order sliced up by high-frequency traders.

However authorities in the US, Europe and Australia are considering tighter regulation of such alternative trading venues amid fears that they could further fragment trading and dent the integrity of public markets.

A survey by the London-based CFA Institute found that trading of US equities on dark pools had risen 48 per cent since the start of 2009 to account for about 31 per cent of total consolidated volume, as of March. The CFA used data from Nasdaq OMX, as it collates the vast majority of equities trading data in the US.

Rhodri Preece, director of capital markets policy at the CFA and author of the report, estimated that there was a similar proportion in Europe. "The results suggest that dark trading does not harm market quality at its current levels but the gains are not indefinite," he said. "If the majority of order flow is filled away from pre-trade transparent markets, investors could withdraw quotes because of the reduced likelihood of those orders being filled.It would be prudent for authorities to monitor these developments closely," he said.

The study calculated that about 18 per cent of total volumes of trades were executed on broker-dealers' own trading desks -- a process known in the industry as "internalisation". That figure included virtually all retail orders, Mr Preece said.

Other block-trading venues, whether independent or bank-owned, accounted for 8-13 per cent of consolidated volume, the CFA said.

It called on broker-dealers to provide significant price improvement offer better prices for retail orders that are internalised, or route the order to public exchanges, so it could be executed against the order book. Mr Preece said such moves would help to uphold market integrity.

"It would thus minimise any disincentive to post displayed limit orders and would uphold market integrity," said Mr Preece.

The CFA called on regulators to monitor the growth in the proportion of dark volume trading and improve the reporting and disclosure around the operations of dark pools.

Last week, an annual survey by Tabb Group, the US capital markets consultancy, highlighted growing industry worries about market quality, shrinking commissions and widespread restructuring among broker-dealers.

      CNN Business

    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Airstrikes, rebels seizing control of oil fields, plus a severe refugee crisis are a recipe for market panic. So why are Iraq oil prices stable?
    • A view of gloves and boots used by medical staff, drying in the sun, at a center for victims of the Ebola virus in Guekedou, on April 1, 2014. The viral haemorrhagic fever epidemic raging in Guinea is caused by several viruses which have similar symptoms -- the deadliest and most feared of which is Ebola. AFP PHOTO / SEYLLOU (Photo credit should read SEYLLOU/AFP/Getty Images)

      The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
    • People enter a casino in Las Vegas, Nevada, on April 18, 2009. Las Vegas is the most populus city in the US state of Nevada and internationally renowned major resort city for gambling, shopping, fine dining and entertainment. Las Vegas which bills itself as the �Entertainment Capital of the World� is famous for the number of casino resorts and associated entertainment. AFP PHOTO/Jewel SAMAD (Photo credit should read JEWEL SAMAD/AFP/Getty Images)

      Macau has overtaken Switzerland in the wealth stakes, being named the world's fourth richest territory by the World Bank.
    • spc marketplace middle east ata atmar a_00010015.jpg

      Saudi Arabian Bateel brand is best known for its delectable dates but it now has more than a dozen cafes and a new bakery in the works.
    • Vantablack designed by Surrey NanoSystems absorbs 99.96% of all light. It however will not be the solution to the creating the world's ultimate slimming black dress! A dress made out of this material would render the curves and contours of the human body invisible and would leave the wearer looking like 'two dimensional cardboard cut-out.'

      A British nanotech company has created what it says is the world's darkest material. It is so dark the human eye can't discern its shape and form.
    • Jibo robot is designed to be an organizer, educator and assist family members. CNN's Maggie Lake met him and says she was impressed with his skills.
    • A picture taken on March 15, 2014 shows children playing at the sprawling desert Zaatari refugee camp in northern Jordan near the border with Syria which provides shelter to around 100,000 Syrian refugees. Syrian refugees in the seven-square-kilometre (2.8-square-mile) Zaatari camp in Jordan fear that President Bashar al-Assad's likely re-election this year will leave their dream of a return home as distant as ever. The brutal war in Syria between the regime and its foes shows no sign of abating and has killed at least 146,000 people since it erupted in mid-March 2011. And 2.5 million Syrians have fled abroad and another 6.5 million have been internally displaced. Jordan is home to more than 500,000 of the refugees.

      Sandwiched in between Iraq and Syria, Jordan's destiny seems to be one of a constant struggle for survival. John Defterios explains.
    • SHEFFIELD, ENGLAND - NOVEMBER 18: Queen Elizabeth II wears 3 D glasses to watch a display and pilot a JCB digger, during a visit to the University of Sheffield Advanced Manufacturing Research centre, on November 18, 2010 in Sheffield, England. (Photo by John Giles - WPA Pool/Getty Images)

      At the last football World Cup, it was all about 3D. This time around, it's nothing less than 4K.
    • An Iraqi worker adjusts a control valve at the Daura oil refinery on November 5, 2009 in Baghdad, Iraq. Iraq and a grouping of U.S and European oil companies Exxon Mobil Corp and Royal Dutch Shell PLC signed a $50 billion contract today to develop the West Qurna oilfield, two days after the Iraqi South Oil Company signed a technical service contract with Britain's BP and China's CNPC to develop the Rumaila oilfield. The Iraqi government is trying to attract foreign investment, especially in the oil sector, in hopes of reviving its war-torn economy. Iraq has the third largest oil reserve in the world but it is producing way below its potential. (Photo by Muhannad Fala'ah/Getty Images)

      Iraq produces 3.3 million barrels per day and has the world's fourth-largest oil reserves. But the current crisis is putting all this in danger.
    • Valves of gas pipe-line are seen in the gas station not far from Kiev on March 4, 2014. The European Union will help Ukraine pay the $2.0 billion it owes to Russian gas giant Gazprom, a top official said Tuesday, as part of an aid package reportedly worth more than one billion euros. AFP PHOTO/ ANDREY SINITSIN (Photo credit should read ANDREY SINITSIN/AFP/Getty Images)

      The gas standoff between Russia and Ukraine could have a knock-on effect on Europe. Explore this map to find out why is the EU nervous.