The world of dark pools lost a sliver of light last week when Credit Suisse decided to stop reporting its dark pool execution volumes to the public.
Since Credit Suisse operates CrossFinder ATS, the largest U.S. institutional equity dark pool, which voluntarily reported its volumes to Tabb Group and Rosenblatt Securities, the decision to go dark is going to impact the accuracy of these services. More importantly, it will erase some transparency from the off-exchange market – comprised of dark pools and broker internalizers— where visibility is already quite murky.
The news attracted attention on Friday when Adam Sussman, partner and director of research at Tabb Group, wrote a blog, “The Biggest Dark Pool Goes Silent.” A number of dark pools have been self-reporting these numbers to us since March 2007. The reporting has helped the industry understand how the behavior of market participants changes during periods of extreme volatility and low liquidity. The numbers also help the industry understand the changing demographics of the market. It is a darn shame that the industry will now lose an important component of that measure. Justin Schack, managing director and partner at Rosenblatt Securities, issued the following statement in response to the new that CrossFinder ATS would no longer disclose its volumes.
"We're disappointed with Credit Suisse's decision, but respect that the firm must ultimately do what it believes is best for its business. We're confident that we will continue to deliver the highest-quality intelligence on dark-pool volumes and trends to our institutional customers."
Crossfinder ATS reported average daily volume of 123 million shares in February, down from 130 million shares in January, which accounted for 1.87 percent of the total consolidated volume, according to Rosenblatt Securities Let There Be Light monthly report on dark pool volumes.
Presumably, institutional clients that rely on these dark pools to match these buy and sell orders anonymously, can obtain the volume statistics on a confidential basis, even if they are not publically reported. But voluntarily disclosing these numbers is extremely valuable to institutional investors since it lays out all the statistics and allows traders to analyze the differences.
In his blog, Sussman conveys that the ranking of the dark pools in Tabb’s Liquidity Tracker is similar to a league table in investment banking deals, and it’s used to attract flow to their dark pools as well as to their algorithms. But if is already at the top then there’s less reason to disclose proprietary information about their volumes, he suggests.
But there are other reasons why a dark pool that is an industry leader would choose to stop reporting its volume statistics. There is a lot of regulatory attention on dark pools in the U.S. regulators at FINRA have applied more scrutiny lately. The SEC could be paying attention to actions taken by other countries.
Australia proposed new rules that would impose a minimum threshold for orders in dark pools and improve disclosure and supervision of off-exchange trading, according to Reuters. In Canada, new rules that took effect in October, that set minimum sizes for dark orders that do not give a better price than public exchanges, have already had a dampening effect on dark pool volumes. According to Rosenblatt’s March 2013 report, Canadian dark-pool market share in February increased slightly month over month to 1.97%, but remains well below the nearly 6% level seen before new rules implemented in October that require significant price improvement or block size for dark trades.
Also, recently CEOs from the major U.S. exchanges, NYSE Euronext, Nasdaq OMX and BATS, met with the SEC earlier this month to push for regulations that would curb off exchange trading. They are upset about the order flows bypassing their exchanges and want the SEC to implement a so-called ‘Trade At’ Rule that would require an order to receive price improvement as a condition of it being executed in a dark pool.
As Sussman noted, regulators are lumping the smaller dark pools volume stats in with the larger off-exchange totals. On its U.S. Equity Liquidity Matrix for March 2013, brokers that match buy and sell orders internally accounted for 20 percent of the volume, while dark pools were about 15 percent, which puts the off-exchange volume in the 35 percent range. In certain months these totals have ranged close to 40 percent.
While the move by Credit Suisse created some controversy, it remains to be seen if this action willl impact the behavior of other dark pools to make a similar decision. On the other hand, it could create an opportunity for other dark pools to publicize their transparency. That would be a positive outcome.
Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio