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US equities: off exchange snapshot

First Published 2nd July 2014

Off exchange trading volumes are in decline against a backdrop of rallying markets, greater transparency and ongoing scandals. What are the statistics saying about emerging trends?

Valerie Bogard, Analyst, TABB Group

Valerie Bogard, Analyst, TABB Group

"The impact of Barclays could result in more regulatory transparency for more investors to gain clarity about these venues."

TABB's liquidity matrix report for May had some largely expected shifts within the market, but some surprises as well in the wake of FINRA's first publicly released data set.

The figures show that industry and TABB-reported dark pool volumes sank 13% in May to 5.8 billion average daily volume from 6.6 billion in April. Speaking to Automated Trader, Valerie Bogard, analyst at TABB Group, said it is not that unusual to see volumes go down during the summer months.

"We don't usually see (dropping volumes) until June or July, so May is a bit early for that starting. Maybe a reason for that is we have seen really low volatility in the market," she said.

May's average close of the VIX was 12.5, the lowest since February 2007.

Some exchanges are shutting their doors. Closure of the National Stock Exchange means Chicago Stock Exchange is the only one left not owned by ICE, Nasdaq OMX or BATS. TABB research shows that ATSs have reached a market peak, reinforcing the consolidation trend.

The monthly report gathers metrics from across the numerous venues in the US, with single dealer platforms and ATSs self-reporting details about average daily volume and trade sizes, among other statistics.

Barclays LX had the top ADV, at 95 million shares, with UBS, MS Pool and Citadel Connect following close behind. Barclays is currently embroiled in the fallout from allegations of wrong-doing brought forward by the New York Attorney General's office.

Goldman Sachs' ATS Sigma X was also recently dragged into the spotlight after the bank's execution and clearing arm received an $800,000 fine from FINRA for failing to prevent executions at prices inferior to the NBBO some years ago. Sigma X is at the lower end of most rankings in TABB's report and there is widespread speculation in the marketplace that Goldman is considering closing the dark pool.

In total, there are 47 active ATSs of which 43 trade NMS stocks. Of those, 7 ATSs have an average trade size about 10,000 shares in NMS stocks with one, Liquidnet Negotiated (buy side only pool), executing more than 10 million per day. The average trade size for on exchange in May was 174 shares.

Liquidnet's business is dominated by trades greater than $200,000 in value and 10,000 shares in size. But looking at block ADV, BIDS came out on top for both when totalled, outranking Liquidnet's buy side only pool significantly.

One of the big surprises, said Bogard, was the emergence of Dealerweb, Tradeweb's ATS. FINRA data show average trade size in the last two weeks in May at 526,930 - significantly larger when compared to competitors.

For OTC only volume, OTC Link ATS has a virtual monopoly, making up 99.8% of the total shares indicated.

Between FINRA and TABB, as well as other groups sizing the market, a clearer picture is emerging of the fragmented US equities market. Bogard expects this to continue.

"We have seen a lot of transparency going forward and I expect there is going to be a lot more. The impact of Barclays could result in more regulatory transparency for more investors to gain clarity about these venues," she said. "(SEC) Chair (Mary Jo) White outlined a series of initiatives related to examining trading venues. It will take a while for implementation but we are seeing the market try to look deeper into the operations of ATSs."