Bloomberg News

Dark Pools Take Larger Share of Trades Amid SEC Scrutiny

June 13, 2014

Mary Jo White

Mary Jo White, chairman of the U.S. Securities and Exchange Commission. Photographer: Andrew Harrer/Bloomberg

The rise of off-exchange trading in the U.S. stock market continues unabated even as regulators question the wisdom of allowing the shift to continue.

Shares changing hands in private venues such as dark pools accounted for 40.4 percent of total share volume on June 10, according to data compiled by Bloomberg. That’s the most since 41.7 percent took place off-exchange on June 22, 2012. The three biggest exchange companies each matched about 20 percent of trading on June 10.

The high came after Securities and Exchange Chair Mary Jo White last week voiced concerns about the level of trading taking place on venues where bids and offers are kept private, masking the true depth of demand for shares. The rise in off-exchange trading came as calmness pervaded markets, with the Chicago Board Options Exchange Volatility Index, also known as the VIX, sliding to a seven-year low last week.

“Its been clearly demonstrated that the less volatile markets are, the more people trade away from exchanges,” Justin Schack, partner and managing director for market structure analysis at Rosenblatt Securities Inc., said in a phone interview. “Brokers also have an incentive to avoid exchanges and their fees, and with overall volumes low, the pressure to avoid costs is quite high.”

The total number of shares traded on June 10 was 5.19 billion, according to data compiled by Bloomberg, compared with this year’s daily average of about 6.5 billion.

Increasing Scrutiny

Alternative trading systems, broker-run private venues which include dark pools, have been under increasing scrutiny in recent months. The New York attorney general has requested information from them in a probe related to high-frequency trading, a person familiar with the matter said last month. In May, ATSs began reporting more data on their trading to the Financial Industry Regulatory Authority, which posted the information on its website.

White said in her speech last week that she supports Finra’s plan to expand the disclosure requirement to off-exchange market makers and other broker-dealers.

“The consensus of the research is that the current extent of dark trading can sometimes detract from market quality, including the informational efficiency of prices,” White said at the Sandler O’Neill & Partners Global Exchange and Brokerage Conference in New York on June 5. “Transparency has long been a hallmark of the U.S. securities markets, and I am concerned by the lack of it in these dark venues.”

Private Stock Trading vs. Public Exchanges

Those comments were welcomed by Nasdaq OMX Group Inc. Chief Executive Officer Robert Greifeld, who has lobbied against dark venues since at least April 2013.

Greifeld was part of a delegation of stock exchange executives who visited the SEC in April 2013 to highlight the rise of off-exchange trading. Their presentation concluded with a request for a rule that would require most trades be sent to an exchange unless private venues could improve on publicly quoted prices by a certain amount. Speaking at the same event as White on June 5, he welcomed her comments about dark trading.

“When you look at the fundamental mission of the SEC, if you make that statement and you believe that, then it’s a call to action,” he said.

To contact the reporter on this story: Sam Mamudi in New York at smamudi@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net Michael P. Regan


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