A Look Back at Dark-Pool Trading in 2011

Author Name: 
Justin Schack and Joseph Gawronski


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 universe[i] 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 shares[ii] — the first time annual dark-pool ADV declined in the four years we’ve been tracking it (see chart below).

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 spiked[iii] 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, next page).

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.

[i] 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.

[ii] All dark-pool volumes referenced in this article are single counted and exclude shares routed away for execution on other venues.

[iii] 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.

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