More ATS’s to Come

Terry Flanagan

Lowered barriers of entry has made it easier than ever for new alternative trading systems and dark pools to enter the marketplace.

Due to regulatory reforms implemented in recent years, including Regulation ATS, as well as  there are by some estimates as many as 50 alternative trading systems in the market landscape, with some participants predicting more to come.

“You’ll start to see more ATS’s in this business,” said David Harris, chief executive officer of the CBOE Stock Exchange. “Because for firms that don’t operate an ATS, they will soon realize that as execution technology is commoditized, you can get a good matching engine for cheap. So why not seek to harness order flow running through your systems? You may see more ATS’s coming down the pike, the cost of entry is going to be low.”

Newcomers to the ATS and dark pool space would probably best be served coming in after the market volatility settles down. According to market data compiled by Rosenblatt Securities, there has been an inverse relationship between volatility and dark pool market share, meaning that as volatility has risen in recent months, market share for unlit venues has declined.

In August, the market share of dark pools in the U.S. fell to a 12-month low despite actual trading volume increasing as volatility reached year-to-date peaks. Dark pools saw their second-best performing month on record as measured by trading volume, with 1.18 billion shares traded daily on average, up 31 percent month-over month. However, that growth paled in comparison to what was experienced for the consolidated markets as a whole, which saw a 46 percent monthly jump to 10.4 billion shares traded per day. On average, the 18 dark venues tracked by Rosenblatt executed about 11.3 percent of total equity volume.

Dark pool market share fell for a second consecutive month in September to 10.7 percent, reaching a low not seen since June 2010. Unlit venues saw a larger decline than exchanges did in trading volume from the record highs seen in August as well, as they were down 21 percent month-to-month, compared to a 17 percent decline for the consolidated markets.

“It’s a very difficult business, margins are very thin,” said Harris. “I don’t necessarily see more exchanges running to get into the environment, unless the exchange is serving some sort of regulatory need that is being unfulfilled in the marketplace.”

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