Valerie Bogard, TABB Group
"There are different matching logics for all these different pools."
Off exchange average daily volume went up in June to 2.2 billion shares from 2.1 billion shares following an industry-wide drop of 13% in May amid record lows for volatility.
Meanwhile, TABB's LiquidityMatrix showed a surprise drop in dark pool volumes for firms reporting directly, declining some 5%.
"Usually, the less volatility in the market, the more off exchange volume you see," said Valerie Bogard, analyst at TABB Group. "We actually saw volumes for trade reporting facilities go up and usually we see a positive relation with TRF and dark pool volumes." Industry market share for off exchange volume went to 38.3% in June from 37% in May.
Barclays took a hit to its LX dark pool after the New York Attorney General's office alleged that the investment bank exposed customers to predatory trading practices. TABB figures show a drop to 82 million average daily shares traded from 95 million the previous month.
In the three weeks following the announcement, Barclays market share out of total ATS volume plunged from about 10% to 3.2% at the lowest point. In the most recent week for which data is available, FINRA figures peg market share at about 3.4%, which could indicate that volumes are stabilising. "The question is whether they can rebuild market share from this point," she said.
The industry will be watching such indicators closely to get a sense of how the regulatory action plays out. "Even though Barclays numbers went down quite a bit, (trading) moved to other dark pools so it is just that there is a shift of order flow," she said.
UBS volumes dropped as well, from 84 million to 79 million, while Citadel Connect in third place got a bump to 71 million from 70 million. IEX had the largest boost in June, at 37 million from a previous 31 million. Total TABB reported ADV was 767 million shares for the month.
Average trade sizes
Average trade size for lit markets stood at 186 shares, compared to 319 for off exchange. Such figures have called into question the argument that dark pools are necessary to protect large block trades. Bogard said that motivations in the market are more nuanced.
Of the dark pools reporting to TABB, two lead the pack significantly - average trade size for Barclays DirectEx was about 74,000 shares, and Liquidnet Negotiated was almost 39,000 shares. However, DirectEx has very low overall average daily volume of some 1 million shares. Compare this to UBS, which has an average trade size of 140 shares.
"If you are looking to access greater amounts of liquidity, you want a pool with larger volumes. You have to look at what you need to do for your order and which pool best correlates," she said. "There are different matching logics for all these different pools."
At the same time, she noted that a trend of transparency is pushing dark pools to be clear about the services they provide and how they differentiate in the market.
Some of this could be a result from regulatory actions taken against the industry and the concern that there is more to come. Aside from Barclays, Citi's ECN LavaFlow agreed to pay $5 million to settle SEC charges of failing to protect confidential client data.
But data being posted by firms about dark pool operations are difficult to consolidate and compare, a reality that has prompted TABB Group to add new metrics doing just that.
It's also tracking the percentage of trades executed at midpoint price. UBS had the top midpoint rank with 64% of ADV traded at midpoint, accounting for 50.2 million shares. Liquidnet was ranked fifth with 4.9 million shares, but notably this accounted for 100% of executions.
Aside from its monthly report, TABB also issued its first quarterly report in the wake of SEC chair Mary Jo White's call for fact-based assessments of US equity market structure. In the first quarter this year, research showed that dark volume accounted for 43.6% of industry shares while the bulk of dark pool volume is accounted for by some 40 dark ATSs. Dark volume consists of retail wholesalers, dark ATSs, hidden exchange volumes and single dealer platforms such as Citadel Connect and Citi Match.