Dark Pools Shine the Light on Record Volumes

Dark books have gained notoriety in the media for anonymously crossing stock trades in non-displayed pools of liquidity, but now they are shining some light on their results as they achieve record volumes.

Today, NYFIX Millennium LLC, said it achieved a single-day record when more than 80 million shares matched in its Millennium alternative trading system (ATS). NYFIX reported that trades were matched in over 2,000 individual symbols.Topping that high, last Thursday Liquidnet, the institutional block-trading marketplace, hit a record of 90 million shares for the day, according to Richard Franco, director - marketing & communications. That week Liquidnet averaged 68.6 million shares a day. Its next best day was in January when it recorded 84.5 million shares.

Of the 90 million shares, about 3.2 million shares came from Liquidnet H20, an aggregator of streaming liquidity from external providers, such as DMA platforms and algorithms, while 87 percent was from the traditional contra-to-contra negotiation model, says Franco. Liquidnet also says the average size traded was up to 54,000 shares, the largest it's been since 2002.

Meanwhile, Goldman Sachs Execution and Clearing reported that SIGMA X crossed 71 million shares on Wednesday, April 25. Of that total, 62 percent were large cap stocks and 38 percent were small-cap stocks. SIGMA X brings together external liquidity providers (XLP), plus non-displayed sources of liquidity and 450 million shares of streaming liquidity flowing through its infrastructure, according to its Web site.

But why are the dark pools, known for anonymously matching buy and sell orders in stocks to avoid market impact, suddenly reporting their trading volumes and market statistics?

Does this mean that dark pools are shining the light on their opaque operations because of reports that the Securities and Exchange Commission (SEC) is studying how they work and what impact they are having on fragmentation or the price discovery at the public markets? These issues were aired at a press breakfast Liquidnet hosted on April 19, featuring Seth Merrin, Liquidnet's founder and Harvey Pitt, former SEC Chairman and now consultant of Kalorama Partners based in Washington, D.C.

According to Liquidnet's Franco, the reason that dark pools are disclosing their volume could simply be that they now have something to talk about. "It's the traditional idea that liquidity begets liquidity, so when you announce the liquidity you have, people are going to take a look," he says. Most of the ATSs were not ready to talk about the kind of volume they were having in the past. "Because these ATSs are so new, they're now having days they want to announce," the Liquidnet executive says.

And with the growing number of dark pools estimated to be around forty, the market is becoming so crowded with automated matching engines and the institutional customers may not pay attention or discern what's different about each one. As a marketing strategy, it's probably a good idea to disclose volume to attract customers as well as to inform the regulators.

Although Tabb Group estimated in January that dark pools and crossing network have captured almost 10 percent of the total equity market, there are signs that the ATSs could be gaining more traction among algorithms that utilize the market's microstructure to the fullest. On April 17, EdgeTrade, an agency broker that provides algorithms and direct-market access software, said that one of its algorithms FAN - a smart execution strategy - executed 28.9 percent of its average daily executions (year-to-date) in the dark, with peak days hitting as much as 66 percent. 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