06.13.2013
By Terry Flanagan

‘Twitterverse’ Talks Off-Exchange Trading

Off-exchange equity trading has always had backers, and critics; the seemingly inexorable rise in its prevalence has made both sides more active in making their viewpoints heard.

Exchanges and some market participants say off-exchange trading hurts market transparency and price ‘discovery’. Operators of alternative trading systems and other market participants support off exchange trading, citing the benefits of choice and the prospect of better execution.

Research on fragmented markets is mixed. Some studies have found that off-exchange trading is associated with higher levels of volatility and wider bid-offer spreads on stocks, while other research has shown it can lower transaction costs.

Markets Media queried market participants and observers on twitter, specifically regarding whether the rise in off-exchange trading was a net positive or a net negative.

Wesley Harr offered qualified support: “rise in off exchange US stock trading is net + 4 mkts adding depth but need 2 fully understand the dynamics or get burned.”

“Retail Investors have never been able to transact with tighter spreads and more price improvement. They are not “traders” so it is a net+” Chucky Hill tweeted.

Other tweeters cited nuances of off-exchange trading without necessarily coming out in favor or against it. According to Eric Scott Hunsader, “the rise is a symptom that lit exchanges aren’t working for those who favor intelligent analysis over brute speed.”

“Its a symptom of an underlying problem – payment for orderflow and the related tape revs which power it at the expense of price formation,” tweeted Mark Schaedel.

In the 140 character of Dennis Dick, “It is concerning. At a certain level it discourages displayed liquidity.”

A theory espoused by agthreesixty is that, “‘Price discovery’ due to stock trading on-exchange vs off-exchange is a myth. It presupposes everyone shows all their order flow to crowd.”

Sal Arnuk advises to “remove all payment for order flow (internalization and maker taker) and the market will decide correct b/t lit and dark bal.”

Some were negative on the rise in off-exchange trading. “w/o meaningful price improvement, harm done to price discovery outweighs tiny benefit to clients,” tweeted Dave Lauer.

“The transparency provided by the lit mkts is vital to protecting investor sfty & ensures best pricing/quoting practices are adhered to,” tweeted Lightspeed Financial.

Longer-term investors need not concern themselves with trading on alternative venues, according to John Mackel. “Off-exchange U.S. stock trading has had no apparent effect on individual investors. Simply focus on your trading plan for the best success.”

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