NO 228 – FEBRUARY 2012
Clearing at the crossroads

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WFE Focus January 2012
A Look Back at Dark-Pool Trading in 2011
JUSTIN SCHACK
Managing Director and Head of Market Structure Analysis at Rosenblatt Securities
JOSEPH GAWRONSKI
President & COO of Rosenblatt

12.04%
the dark pools’ share of consolidated equity volume in 2011

Rosenblatt Universe Annual ADV (millions of shares) and Market Share

The following article is an edited excerpt from the year-in-review issues of Rosenblatt Securities’ Let There Be Light reports on dark-pool volumes and trends. Rosenblatt publishes a US and European edition of LTBL each month for its clients. The reports marry often hard-to-obtain volume data for dark pools in both regions with analysis of what is driving activity in these venues.

US Dark Pools: Growth Slowed as Institutions Scrutinized Order-Handling Conflicts

Perhaps the most noticeable and significant development of 2011 for US dark pools was the plateauing of what had been very rapid growth for both non-displayed volumes and market share.

On a full-year basis, the dark pools in our universe1 captured a larger share of consolidated equity volume in 2011 (12.04%) than in 2010 (11.40%). But their collective average daily volume declined from 966 million shares to 950 million shares2— the first time annual dark-pool ADV declined in the four years we’ve been tracking it (see chart, righthand side).

Moreover, the increase in market share on a full-year basis appears to have been driven largely by a strong Q1 and Q2, when monthly market share fluctuated between 12.11% and April’s record-high 13.27%, following a healthy 2H10. Later in 2011, particularly as volatility spiked3 from August to November, market share sagged, plunging as low as 10.78% in September. December’s rebound to 12.37%, higher than the full-year 2011 figure, came as volatility fell dramatically, and may signal a return to market-share growth (see chart, above).

Still, it seems clear that the brisk expansion seen during much of 2008-2010 — which was driven in large part by the formation of new venues, increased adoption of algorithms by buy-side traders and structural changes implemented by big brokers — is very much a thing of the past. Dark pools in the US clearly have entered a more mature phase, during which secular market-share growth has slowed.

One specific characteristic of this new era for US dark pools may be that institutional traders are getting choosier about where their dark orders (and indeed, all their orders) are executed. Consider our data on dark-pool activity by category, for example. In 2011, venues operated by bulge-bracket brokers expanded their market share dramatically, to 57.27% of the ADV executed by our universe, compared with 53.98% in 2010. That’s no surprise, as it continues a long-running trend we first identified in 2009. The difference in 2011 is in what happened to the other three categories.

One specific characteristic of this new era for U.S. dark pools may be that institutional traders are getting choosier about where their dark orders (and indeed, all their orders) are executed.

Specifically, independent/agency pools, which had been steadily losing market share for the better part of two years, rebounded significantly in 2011, rising to claim 15.20% of our universe’s ADV, compared with 13.27% in 2010. Most interestingly, dark markets run by automated market makers (GETCO’s GETMatched and Knight Capital Group’s Knight Link) suffered a 470-basis-point decline from 2010 to 2011 (see chart, righthand side). This occurred even as volatility, on which they typically thrive, increased. The average daily closing value of the CBOE’s VIX index rose from 22.55 in 2010 to 24.20 in 2011.

To be sure, the full-year volatility figures may be somewhat misleading. Even though the VIX spiked to well over 30 from August through November, six of the first seven months of 2011 saw the VIX average daily close at less than 20. However, it also seems clear that a change occurred last year in the relationship between the portion of dark-pool volume executed by market-maker venues and the VIX. Previous spikes in the VIX — during the financial crisis in late 2008 into early 2009, as well as around the May 2010 “flash crash” — resulted in higher share for market-maker pools than the most recent one in late 2011 (see chart, below).

We believe that one reason for these phenomena is that institutional traders are scrutinizing execution quality and conflicts of interest in broker order routing like never before. This trend has been steadily building for a few years now — and we certainly have been urging the buy side, in these pages and elsewhere, to learn more about the pricing, rules and routing practices of various venues and algorithms so that they can make sure they’re using the proper tools for every trade. But there’s no doubt that it was kicked into higher gear by the October scandal involving Pipeline Trading, which settled SEC charges that it secretly filled the bulk of the orders customers sent to its dark pool not by matching them against other customers as advertised, but instead by having an affiliated, proprietary market making firm fill them as principal. More and more institutions are asking intermediaries for detailed information about order handling and execution practices, and scrutinizing this data for any impact on execution quality. In many cases they are changing their behavior as a result, sometimes by asking brokers to exclude automated market makers from their routing logic. It’s important to stress here that there is no hard-and-fast rule about whether such venues help or hurt execution quality, though they generally require the end customer to pay the full spread while charging the broker no fee or even paying a small rebate. Indeed, we believe there are different tools for different tasks, and picking the right one is the key. But it’s clear that at least some buy-side traders prefer not to interact with what they regard as more informed counterparties, and are proactively avoiding them.

Independent/agency pools — which, while not completely devoid of automated market makers and other high-frequency traders, are generally less amenable to this class of customer — may be benefiting as a result. Indeed, of the eight independent/agency venues in our universe, five gained market share on a full-year basis in 2011 compared with 2010.

The average size of a U.S. dark-pool execution has shrunk dramatically over the past three years, from a high of 433 shares in March 2009 to an all-time low of 226 shares last month.

Interestingly, bulge-bracket brokers may also be gaining from this trend. Institutions are unlikely to simply stop trading with these firms or dramatically reduce their interaction with them, because they provide a host of services like research, capital commitment and access to new-issue allocations that, for the most part, are still bundled with secondary trading commissions. However, after initially trying to deflect hard questions about routing conflicts, the big brokers are increasingly providing richer data to customers and developing schemes by which institutions can choose not to interact with certain types of counterparties or trading strategies in their dark pools and algorithms. This could be one reason for the continued strong growth of bulge-bracket dark-pool market share. Three of the five venues that gained the most market share in 2011 compared with 2010 are operated by bulge-bracket brokers. The category also boasts two of the five-fastest ADV growers during the same period.

However, the resurgence of independent and agency-backed venues has most decidedly not meant a return to block trading in dark pools. One powerful measure of this is the average trade size for our entire universe. We calculate this by dividing the total number of shares traded for all the pools we track by the total number of transactions. The average size of a US dark-pool execution has shrunk dramatically over the past three years, from a high of 433 shares in March 2009 to an all-time low of 226 shares last month (see chart, page 19).

As we’ve stated previously, we believe the era of the big block is likely over for good. To be sure, pools like Liquidnet have served that portion of the market well. And new entrants such as AX ATS, which went live last month, will keep trying to build better block platforms. But traders by and large are more likely today to talk about trading blocks than to actually buy or sell large quantities in single executions. We attribute this to a greater emphasis today than in the past on transaction-cost analysis benchmarks like VWAP, which may make traders more cautious about stepping up for a block, as well as the steady forward march of slicing and dicing large orders into tiny pieces using algorithms. As new generations of traders cut their teeth using these tools, the golden era of the block passes further and further into the past.

We believe the era of the big block is likely over for good.

Will Canada’s Rapid Growth Be Short-Lived?
Before moving on to discuss Europe, we’d like to briefly take note of the recent, rapid growth of dark-pool activity in Canada. The market structure of our northern neighbor has been undergoing a transformation over the past few years that leaves it resembling ours in many ways. Multiple ATSs and exchanges now compete with the Toronto Stock Exchange for volume in TSX- and TSX Venture Exchange-listed stocks, and automated market makers using low-latency technology account for an increasing portion of overall trading activity. Exchanges and ATSs have courted the high-frequency set, primarily by paying some of the world’s highest rebates to traders whose limit orders are executed against aggressive flow That, in turn, has driven up costs for traditional dealers, who find themselves more frequently hitting bids, lifting offers and paying the higher take fees made necessary by Canada’s outsized “maker” rebates.

Consequently, these dealers and others increasingly are turning to dark pools to manage costs and regain access to the market’s least informed order flow. Alpha Group, a consortium of Canada’s major dealers that operates the leading lit rival to the TSX (Alpha’s lit book has claimed about 18-20% of Canadian consolidated volume in recent months), in June launched a new dark facility called IntraSpread. The product allows dealers and other users to post dark orders that can only be accessed by aggressive retail flow, with price improvement as little as 10% of the spread. ITG’s MatchNow is similar in that it offers liquidity providers an 80% spread capture, but does not restrict aggressive participants to only retail customers. The growth of these two venues has driven most of the dramatic expansion of dark-pool activity in Canada over the past year and a half.

the share of Canadian consolidated volume executed by the country’s five dark pools hit a record-high 3.90% for the month of September, before easing slightly in Q4 and settling at 3.62% in December.

Indeed, the share of Canadian consolidated volume executed by the country’s five dark pools hit a record-high 3.90% for the month of September, before easing slightly in Q4 and settling at 3.62% in December. That’s more than double the 1.61% seen in May, before the June launches of IntraSpread and Instinet ICX, as well as the October launch of Goldman Sachs’ Sigma X Canada (see chart above). MatchNow has doubled its market share since the beginning of 2011, and IntraSpread grew to more than 1.5% of the market in the space of just a few months. So far ICX and Sigma X are executing little volume. We should note that these market-share figures likely would be even higher if we excluded TSX Venture Exchange-listed shares, which typically have very low share prices and therefore trade at inflated volumes. Without the TSXV volume, dark market share is likely about 5%.

However, proposed regulations could change the current situation dramatically. The Canadian Securities Administrators and Investment Industry Regulatory Organization of Canada in July proposed new rules that would establish a minimum size for all dark orders, and restrict the use of dark orders below that minimum size to instances in which significant price improvement is delivered. By “significant,” regulators have indicated that they mean at least one tick, and half a cent in cases where the spread is one penny. This regime would render the country’s two biggest dark pools non-compliant and likely force them to alter their spread-capture structures, which have been critical to their success. It also would deter additional dark-pool launches by non-Canadian dealers like Credit Suisse, which has stated that gaining the de minimis dark-pool market share possible under such a regime, in a market that is already smaller than both the US and EU, would not be economically viable. The proposals have yet to be formally adopted, and dealers and other market participants have voiced serious concerns with them. This will be a situation to watch closely in 2012.

The proposals have yet to be formally adopted, and dealers and other market participants have voiced serious concerns with them.

Looking Ahead at 2012
We’ve long said we don’t particularly care for the spasm of prediction-making that accompanies the turn of each calendar year. It feels artificial and gimmicky, not to mention that actually predicting the future, outside of lucky one-off guesses, is pretty much impossible. However, last year we were goaded by many readers into offering some thoughts on what 2011 might bring. With that precedent set, we now look back on how we did and weigh in on what we see coming in 2012 (though we still emphasize we regard our forward-looking comments more as highly educated guesses than “predictions,” and our goal is to capture long-term trends).

internalization did become one of the hottest market-structure issues of 2011.

First, a 2011 scorecard:
1. We said that US dark-pool market share would grow again in 2011, “though not at the heady rate seen during the past few years,” with our universe ending the year at around 15%. Outcome: Partially right. We successfully forecast the tapering off of market-share growth, but failed to foresee the late-year volatility spike that suppressed non-displayed activity.

2. We said that consolidated volume would struggle to break 8-8.5 billion shares per day, amid continued low volatility, potentially prompting some non-displayed venues to assess strategic options. Outcome: Correct. Consolidated volume fell 7.54%, from 8.47 billion in 2010 to 7.83 billion in 2011. Although just one notable dark pool — BlockCross — was sold, as part of State Street Global Markets’ acquisition of Pulse Trading, we believe that sagging volumes have fueled much more thinking about and discussion of strategic transactions.

3. We said that regulators would seriously consider restrictions on off-exchange trading in 2H11, as debate over internalization once again flared up. Outcome: Partially right. We may be a bit generous in our self-assessment here, as the SEC has not proposed any new rules on internalization. However, internalization did become one of the hottest market-structure issues of 2011, particularly later in the year as the NYSE proposed a pilot program to allow market makers and other customers to post dark orders at slightly better prices than displayed quotes, which would be accessible only by aggressive retail orders (similar to Alpha’s fast-growing IntraSpread facility in Canada). NYSE’s proposal generated a flurry of comment letters from rival exchanges and other market participants, some of whom urged the SEC to tackle the issue of internalization not in piecemeal fashion by approving (or not approving) this plan, but rather holistically — perhaps by issuing a concept release that would lead to a revision of internalization rules.

4. We said the SEC flash-order and dark-pool proposals from 2009 would see no action in 2011 and instead be revisited along with the broader internalization debate later in the year. Outcome: Mostly right. Neither proposal was acted upon last year, though the SEC has not indicated whether it will create a formal process to review dark trading that will fold in the issues and concerns it raised in 2009.

5. We said that new launches and continued debate over the structure of dark platforms would make non-displayed trading in Canada far more interesting in 2011. Outcome: Correct. As we outlined in the previous section, dark market share has surged in Canada since mid-2011, amid debate over whether the structures that have driven this expansion should be allowed to stand. In retrospect, we set a fairly low bar for ourselves on this one, though it was far from clear that Alpha’s IntraSpread facility would take off to the extent it did.

6. We said that incumbent exchanges in emerging markets and developed Asia would begin experimenting more with hidden orders and dark pools, in attempts to head off pending competition from US and European competitors. Outcome: Mostly right. Mexico’s BMV introduced hidden orders last year in an attempt to reclaim some of the volume that is crossed outside of the country, in both OTC and ADR markets. BM&F Bovespa in Brazil proposed a block trading facility, only to have it rejected by regulators. Major Asian markets didn’t do much in this department, however, outside of the existing partnership between Chi-X Global and SGX Singapore exchange on a joint, pan-Asian dark pool called Chi-East.

Now, onto some ideas for what to expect in 2012:
1. Dark pools turn in modest market-share growth, as volatility remains tame but the secular tailwinds of new-venue formation, increased adoption of algorithmic trading and broker aggregation of internal flows largely disappear. If the VIX can remain below 30 throughout 2012, full-year market share could reach 12.7%, up from 2011’s 12.04%. All bets are off, however, if a rekindling of the European crisis or some other dislocation grips markets for an extended period — or if regulators allow greater exchange-facilitated internalization or pass new rules that would encumber existing dark pools.

2. Regardless of how the SEC ultimately votes on the NYSE RLP proposal, the internalization debate finally takes front and center among market-structure issues. Additionally, the SEC is able to turn its attention to these topics later in the year, as Dodd-Frank’s blown 2011 deadlines and lingering systemic-risk concerns related to the 2010 “flash crash” are dealt with during the first half of 2012. The roundtables we envisioned in last year’s prediction section, or at least a concept release on internalization (possibly combined with other market-structure issues like soaring message traffic, in a     re-floating of the agency’s January 2010 concept release), will occur toward year-end.

Consolidated volume in the U.S. is flat to slightly higher in 2012, though certainly not at the heady levels seen toward the end of the largely structurally driven volume growth of the 2000s decade.

3. Consolidated volume in the US is flat to slightly higher in 2012, though certainly not at the heady levels seen toward the end of the largely structurally driven volume growth of the 2000s decade. The end of 2010 was peculiar in that soaring volatility, which often drives overall volume higher, coincided with weak market volumes. Retail and institutional volumes may have troughed during this period, as investors largely sat out a market that was being roiled by its third major bout of unusually high volatility in just three years, one of which coincided with the worst financial crisis in most of our lifetimes. Automated market makers and other high-frequency traders, despite reducing their participation rates since 2008-09 because of easing volatility, are not going away and should remain at 50% or more of consolidated volume, assuming a static market structure. Consequently, we don’t see volume declining much further from current levels. And with the US economy showing renewed signs of life that may drive stock prices and the number of new issues higher, a return of retail and institutional investors to the market could support a slight increase in volume as the year goes on.

4. Market participants will continue to experiment with ways to segment trading markets according to customer and behavior types, so that traders can choose to interact only with desired counterparties. In other words, the trend toward traders getting choosier about where and how their orders are executed, which we observed in the previous section, will intensify in 2012. Bulge-bracket brokers will attempt to distinguish themselves by devising new, more nuanced ways to filter out “toxic” or “predatory” order flow from their dark pools and algorithms. Currently the most popular way to do this is by classifying customers as either high-frequency, institutional or retail and allowing any one segment to block another — or by allowing institutions to eliminate certain venues from their routing logic, as we discussed earlier. Some brokers are beginning to take this a step further by focusing on behavior rather than customer type, allowing institutional customers to continue to interact with “good” HFT or to filter out “bad” institutional peers. New ATSs and exchange structures may spring up with these goals in mind as well. In recent days we’ve heard of one ATS veteran contemplating a “social market,” in which Wall Street borrows a page from Facebook and other social media and allows customers to trade only with their “friends.”

On a full-year basis, the 18 non-displayed venues we track executed 3.22% of consolidated     pan-European turnover in 2011.

5. Canadian regulators dig in their skates on dark trading, offering only modest concessions, if any, to the dealer community on their proposed restrictions. Clever dealers and other market participants try their best to replicate current structures under the new rules, but the share of consolidated volume executed in dark pools falls once the new rules are in place, while exchange and lit-ATS hidden-order types, such as TSX’s dark midpoint order, benefit as a result.

European Dark Pools: In the Midst of a Brisk, Multi-Year Expansion

Looking back on the year in European dark pools, several developments and trends are worth noting. First, the market share of our universe increased markedly in 2011. On a full-year basis, the 18 non-displayed venues we track4 executed 3.22% of consolidated pan-European turnover in 2011. That’s up from 2.51% in 2010. Looking on a monthly basis, our universe reached an all-time high market share of 4.18% in October and settled in December at 3.77%. These levels are significantly higher than the 2.93%-3.27% range seen in Q111, and up dramatically from a Q2 trough that saw market share dip as low as 2.13% in May (see charts, righthand side and next page). And, as we’ve stated in previous reports, we believe the true share of dark venues, taking into account venues that don’t report to us, could be closer to 5.5%-6% (and that’s without considering potential over-reporting of OTC trades that may inflate consolidated turnover and result in dark market share being higher).

We believe that European dark pools are moving into the middle stages of a brisk, multi-year expansion, similar to that experienced by their US counterparts during the period extending roughly from 2006-2010. This phase is characterized by continued formation of new non-displayed venues, as new and existing market participants adapt to changing regulations that open up traditional exchanges to meaningful competition for the first time. Additionally, existing dark pools experience rapid growth in customer activity as algorithmic trading becomes more popular among both institutional investors and their brokers. In particular, big banks and brokers can take as long as two to three years to aggregate orders from myriad customer and proprietary desks and systematically preference their own dark pools with this flow.

existing dark pools experience rapid growth in customer activity as algorithmic trading becomes more popular among both institutional investors and their brokers.

Thinking of the European dark-pool landscape in this way leads us to two more trends we’ll cover in this section: volatility has yet to develop a clear relationship with dark-pool trading and the share of dark pool trading done in Bank/Broker platforms is bigger than ever, as Independent/Agency and dark books run by Exchanges and Lit Multilateral Trading Facilities pools languish. Let’s first tackle volatility, which does not appear to affect European dark volumes the same way as it does in the US, where dark-pool market share and the average daily close of the CBOE’s VIX are usually inversely correlated. This relationship has been most pronounced in the US since mid-2009, when volatility was declining from the extreme highs of the financial crisis and the dark-pool market was beginning to mature. Referring again to the monthly market share chart on page 21, we see that volatility and dark-pool market share moved in the same direction six times during 2011, but in opposite directions just three times (the three other month-to-month changes were inconclusive because the FTSE-100 VIX and VSTOXX moved in different directions). It’s possible that other differences between the US and European markets (such as value traded rather than shares traded being the primary measure of activity) account for this difference, and that the inversely correlated relationship that exists in the US will never develop in Europe. Still, we will be watching for the share of turnover in non-displayed venues to begin showing such an inverse correlation with volatility in 2012. That could indicate that the European dark market is entering a mature phase in which growth may slow.

Another sign that European pools are moving from early development into the middle of a growth phase is the growing share of dark volume occurring in venues run by big banks and brokers. Looking at full-year data, Bank/Broker venues executed 62.57% of our universe’s turnover in 2011, up from 61.63% in 2010. Independent/Agency platforms saw their share decline from 9.41% to 8.37%, while Exchange/Lit MTF dark books were essentially flat. Month-to-month figures for 2011 show that the trend became much more pronounced as the year went on, with the Bank/Broker category hitting a record 70.91% by December, Exchange/Lit MTF pools plummeting to a record low 21.00% and Independent/Agency registering 8.09% (see charts, righthand side and next page).

European pools are moving from early development into the middle of a growth phase.

Bulge-bracket banks such as Credit Suisse, Deutsche Bank, Goldman and UBS clearly have been aggregating disparate client, proprietary and principal flows and directing them toward their own dark venues, much the same way they did in the US a few years ago. Some, like Goldman and UBS, also have launched dark MTFs that have helped fuel their growth. The top 3 venues in terms of full-year 2011 turnover and share of consolidated volume — and 6 of the top 10 — are in the Bank/Broker category. Additionally, among the pools that gained the most market share (of consolidated turnover) on a full-year basis from 2010 to 2011, Bank/Broker venues were first, second, and fourth, adding a total of 51bps, or 72% of the 71bp y/y market-share gain of our universe as a whole. Some of these gains came at the expense of fellow bulge-bracket pools. But this was not enough to weigh down the group as a whole, and pools in the other categories did not grow fast enough to keep pace with the big banks. The fastest-growing Independent/Agency venue added just 4bps y/y. And most Exchange/Lit MTF dark books grew at a slower pace than fastest-growing bulge-bracket platforms.

dark books operated by displayed markets still fare far better in Europe than in the U.S.

To be sure, dark books operated by displayed markets still fare far better in Europe than in the US, where the NYSE, Nasdaq and others largely ceded the dark-pool space to broker-backed and independent pools, while claiming about 3-4% of consolidated volume with hidden order types that are integrated with lit order books. Part of this can be chalked up to regulatory differences between the US and the EU, which requires any dark orders that are integrated with lit books to qualify for a “large-in-scale” waiver to pre-trade transparency. To do so, orders typically have to be far bigger in terms of value traded than most traders want to commit to an integrated book, so these order types result in de minimis volume in Europe currently. But exchanges and other displayed markets have done a better job of anticipating and meeting demand for trading in separate dark pools, as illustrated by Chi-X, Turquoise and BATS occupying the fourth, fifth and seventh spots, respectively, in our ranking of biggest such venues in 2011. Seeing the market-structure transformation that took place in the US prior to the November 2007 implementation of the Markets in Financial Instruments Directive (MiFID), which opened up national exchanges to true competition for the first time, clearly helped displayed markets, though it can be argued that incumbents such as LSE and Deutsche Börse haven’t fully heeded that example. LSE, for example, only acquired a meaningful dark book through its purchase of Turquoise, a primarily lit rival MTF, in 2010.

One wild card could both slow the expansion of European dark pools and cause it to hew less closely to the US model: regulation. There is a thicker cloud of secrecy shrouding broker crossing networks, in particular, in Europe than in the US. Neither jurisdiction currently requires brokers to publicly report data on trading activity, but this may change in Europe under the so-called MiFID II legislation that is currently pending in the European Parliament. As we have discussed many times in previous European editions of Let There Be Light, the Organized Trading Facility designation contemplated by MiFID II would bring broker pools such as Deutsche Bank’s Super X, Credit Suisse’s Crossfinder, Citi Match and Goldman’s Sigma into the public reporting regime that today captures activity at listing markets and MTFs (Goldman, UBS and Nomura also operate MTFs alongside their other dark services). Indeed, several big brokers tell us that they will not share their crossing turnover data with us out of concern that they will inflame the regulatory debate over additional regulation of, and disclosure by, broker crossing networks (some surely also worry that their turnover is not as large as their rivals and don’t want to draw public attention to that fact). Under the current proposal, banks would be barred from trading as principal in their OTFs or connecting them with similar venues run by other brokers. This, along with other potential changes such as minimum-size requirements and alterations to the current pre-trade price transparency waivers, could slow or reverse the growth of non-MTF broker pools. It also could result in more brokers launching systematic internalizer (SI) platforms or MTFs that would allow for the activities that are prohibited inside OTFs. But the debate in the European Parliament is expected to rage on for quite some time, with the possibility that the legislation still could be changed from its current form. Some people we speak with in Europe think that implementation of the new directive could wind up being put off to as far out as 2015. By then, the proverbial genie could be permanently out of the bottle.

We wouldn’t be surprised to see our universe break the 5% market-share barrier in 2012

What to watch out for in 2012: We’ve already hinted at several things to be on the lookout for in 2012, such as a stronger relationship developing between dark-pool market share and volatility. Overall, we believe that European dark pools will again gain market share in 2012, despite continued regulatory uncertainty over the legal status of dark pools and what structures they will be permitted to maintain once MiFID II is implemented. The growing acceptance among buy-side traders of using algorithms and smart routers to navigate fragmented markets will continue to fuel this growth. We wouldn’t be surprised to see our universe break the 5% market-share barrier in 2012, which would likely put the overall share of dark turnover in Europe at 7%-8%.

Copyright 2012. Rosenblatt Securities Inc. All rights reserved.
Rosenblatt Securities Inc. seeks to provide and receive remuneration for Agency Brokerage, Market Structure Analysis, and Investment Banking Advisory Services. Rosenblatt Securities Inc. may, from time to time, provide these services to companies mentioned in this analysis. This material is not a research report and should not be construed as such. Neither the information contained herein, nor any opinion expressed herein, constitutes the recommendation or solicitation of the purchase or sale of any securities or commodities. The information herein was obtained from sources which Rosenblatt Securities Inc. believes reliable, but we do not guarantee its accuracy. No part of this material may be duplicated in any form by any means. Member NYSE, FINRA, SIPC.

About Justin Shack

JUSTIN SCHACK is a Managing Director and Head of Market Structure Analysis at Rosenblatt Securities, an institutional agency brokerage in New York. Schack is the lead writer for the firm’s Trading Talk reports, which are widely recognized as an authoritative voice on global market structure and the exchange industry. He also is a member of the Market Structure Advisory Committee of the Toronto Stock Exchange and TSX Venture Exchange. Prior to joining Rosenblatt in February 2008, Schack spent 14 years as a financial and public-affairs journalist, most recently as Assistant Managing Editor of Institutional Investor, where he authored more than 20 cover stories during his eight years on the magazine’s staff. His work has been recognized with awards from the National Press Club, the Society of Professional Journalists and the American Society of Business Publication Editors. Schack holds a BA in history from Seton Hall University and an MA in history from the University of Connecticut.

About Joseph Gawronski

JOSEPH GAWRONSKI is the President & COO of Rosenblatt. Joe was formerly a securities lawyer with Sullivan & Cromwell, a Vice President in the equities division of Salomon Smith Barney and COO of Linx LLC, a block crossing network start-up. He holds a BA in Public and International Affairs from Princeton’s Woodrow Wilson School and a JD from Harvard Law School. He is an Allied Member of the NYSE, a member of the NYSE Hearing Board, a member of the Advisory Boards of both The Journal of Trading and Wall Street & Technology, as well as a term member of the Council on Foreign Relations.

About Rosenblatt Securities

Founded in 1979, Rosenblatt Securities is a boutique institutional brokerage with offices in New York and Dublin. The firm uses advanced technological tools to represent institutional investors on an agency-only basis in global equity markets. Rosenblatt is also the leading provider of analysis on global exchanges and market structure, and offers consulting and investment-banking services to companies in the exchange industry and related sectors. For more information, please go to our website, at www.rblt.com.

Our US universe consists of 19 venues, which we believe execute the vast majority of dark-pool volume. We estimate that an additional 1.5% of consolidated US equity volume is executed by dark pools that decline to share their data with us. Importantly, our dark-pool universe does not include other off-exchange volume, such as retail orders executed as principal by market makers, which can account for another 15-18% of US volume, depending on market conditions.
All dark-pool volumes referenced in this article are single counted and exclude shares routed away for execution on other venues.
We have long observed an inverse relationship between the market share of US dark pools and volatility, as represented by the VIX average daily closing value. This has been particularly pronounced since mid-2009, as the worst of the global financial crisis (and the extreme volatility levels associated with it) abated. We believe that traders avoid dark markets during volatile times for a number of reasons, including greater urgency to "get done" by removing displayed liquidity and greater faith in the more-robust matching-engine technology of displayed markets.
Our 18-pool European universe captures most dark-pool volume but excludes certain broker crossing networks that will not share their turnover data. We do capture what we believe are the very largest of these venues, however, including those operated by Goldman Sachs, Credit Suisse, Deutsche Bank and Citigroup.
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