Block Trading Size in Focus

Terry Flanagan

U.S. equity dark pools have proliferated over the past decade, but the quality of the venues hasn’t kept up with the quantity, according to CEOs of two of the largest block-trading venues.

“Most dark pools do not provide any value above and beyond what exchanges provide,” Liquidnet chief executive Seth Merrin said Tuesday at the Sandler O’Neill Global Exchange and Brokerage Conference in New York.

“Exchanges are good for price discovery, but they have never been good for size discovery,” Merrin said.

As a result, institutional investors need to find alternative venues to transact large blocks of stock efficiently.

Liquidnet’s average trade size is about 42,000 shares, Merrin said, while rival ITG Posit Alert weighs in at about 35,000, according to ITG CEO Bob Gasser. That compares with just a few hundred shares for many of the several dozen U.S. dark pools.

Gasser said many dark-pool operators overdo it on internalization, or executing orders on their own venue for market share considerations rather than because it improves the trade execution vis-a-vis other venues. “Those guys will be marginalized” as regulators more closely scrutinize internalization, Gasser said.

The Financial Industry Regulatory Authority (Finra) this week began providing data indicating the activity levels in each alternative trading system (ATS), including all market facilities commonly called dark pools. This information will shed light on the securities that are traded in each dark pool, which occurs away from traditional stock exchanges.

While the trades in these facilities are made available on a real-time basis to investors and professionals through securities information processors (SIPs), these trades are not attributed to a specific ATS or dark pool. ATSs account for a significant percentage of total OTC trading in exchange-listed equities in the United States. Currently over 30 percent of the total National Market System volume of shares traded occurs over the counter.

“Finra hopes that providing a clear view of the level of activity handled by these ATSs or ‘dark pools’ will increase market transparency and thereby enhance investor confidence,” Steven Joachim, Finra executive vice president, transparency services, said in a statement.

The commitment to transparency is bringing light to what was previously a dark area of the equity markets, according to Joachim. Making this information available to both the investing public and market participants provides an unprecedented view into the activity of these highly significant trading venues, he said.

Merrin said exchanges used to look at dark pools as competitors, but now the relationship is seen more as complementary.

Both CEOs are seeing strong growth in Europe and Asia. Asia “is the next big wave” as market participants gain more leeway to seem better execution, Gasser said.

Merrin said he’s seeing capital flows in Europe and Asia, but its quieter in the U.S., where “it’s the most unloved bull market in history.”

Featured image via Flickr/ Matthias Rhomberg under Creative Commons

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