Skip to main content

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

By Philip Stafford , FT.com
updated 9:31 PM EST, Mon November 19, 2012
Trading of U.S. equities on
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

(CNN) -- 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.

ADVERTISEMENT
Part of complete coverage on
updated 4:04 AM EDT, Thu October 9, 2014
Liberia, Sierra Leone and Guinea -- the three countries facing the biggest health crisis -- are also facing huge bills to try and contain the virus.
updated 9:16 AM EDT, Mon September 22, 2014
Twitter has lost its position in the top 20 coolest brands for the first time in three years.
updated 11:54 AM EDT, Thu September 25, 2014
As the crisis in Iraq escalates, CNN looks at how Iraq could crack down on ISIS' oil riches under the guidance of its new oil minister, Adel Abdul Mahdi.
updated 4:42 AM EDT, Fri August 29, 2014
Recep Tayyip Erdogan is Turkey's new president . So can he revitalize its economic fortunes?
updated 1:24 PM EDT, Fri September 19, 2014
Experts share their tips on cities they see as emerging financial hubs...they're not where you think.
updated 11:11 AM EDT, Thu October 9, 2014
Growing numbers of us are willing to serve as bank, teacher or travel agent to people we have never met, and entrust them to serve us in turn.
updated 8:44 AM EDT, Thu August 28, 2014
The European Union is stepping in to save its dairy from going sour.
updated 8:36 AM EDT, Mon August 18, 2014
Europe's deteriorating relationship with Russia has hit the region's growth, even before new food sanctions begin to bite.
updated 12:34 PM EDT, Wed July 16, 2014
With cyberattacks on the rise and here to stay, it's a modern-day challenge for people and businesses to get smarter about preventing them.
updated 9:24 AM EDT, Thu August 14, 2014
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?
updated 7:24 AM EDT, Fri September 19, 2014
Peer-to-peer finance lets businesses bypass bank loans. Creative companies with quirky ideas find new lending models advantageous.
updated 11:24 AM EDT, Sun July 20, 2014
Evidence points to pro-Russian separatists as perpetrators of the attack and Vladimir Putin is facing questions, David Clark writes.
updated 5:52 AM EDT, Wed September 3, 2014
CNN's Jim Boulden looks on the future of online shopping.
updated 10:40 AM EDT, Tue August 5, 2014
The biggest Ebola outbreak in history is taking its toll in Western Africa, hitting some of West Africa's most vulnerable economies.
ADVERTISEMENT