Tag Archives: dark trading pools

ETF News

NASDAQ Challenges the NYSE to Run Dark Pools

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MarketMuse update courtesy of Reuters in CNBC

The NYSE has recently come close to completing a deal with some big banks to take over running the banks’ dark pools. Now, NASDAQ is proposing an alternative solution as they eye running dark pools for banks as well.

Nasdaq OMX Group has approached several big banks with a proposal to take over the operation of their so-called “dark pools,” and plans to seek regulatory permission to do so, The Wall Street Journal reported, citing Nasdaq Chief Executive Robert Greifeld.

The new initiative was a response to the needs of the company’s customers and not a strategic change, the Journal quoted Greifeld as saying.

Exchanges have been losing market share to broker-run alternative trading systems, including “dark pools,” partly as brokers seek to avoid high exchange fees.

Dark pools are broker-run electronic trading venues, and several big banks have one. They allow investors to trade anonymously and only make trading data available after a trade, reducing the chance that others in the market will know about the buyer’s or seller’s intentions and move the price against them.

Dark pool venues have come under scrutiny amid concerns their unlit markets may drive too much volume away from traditional exchanges and make it hard for investors to see demand and potentially distorting prices.

Last month, Citigroup said it would shut down its alternative stock trading venue LavaFlow, at a time when regulatory scrutiny has increased around broker-run trading platforms, forcing banks to rethink the costs. Wells Fargo shut its dark pool in October, citing a lack of customer demand.

Banks’ “costs are skyrocketing and our job is figuring out how we can help them solve that problem,” Greifeld told the Journal.

Using its technology, surveillance software and regulatory expertise, Nasdaq can manage dark pools on behalf of banks, still allowing them to trade at lower prices than they do on exchanges and letting bank customers trade anonymously, the newspaper reported.

A final business product hasn’t been completed and plans may change, the Journal said.

Representatives at the Nasdaq were not immediately available for comment outside regular U.S. business hours.

The U.S. Securities and Exchange Commission Chair Mary Jo White announced last year that she planned to propose new rules that would require alternative trading platform operators to disclose more details to the public about the way they operate.

For the original article, click here.

Tech Talk

Dark Trading Pools: Deconstructing Market Structure?

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MarketMuse update courtesy of Anna Bernasek 9 January article in The New York Times.

JUDGING solely by the name, stock trading in so-called dark pools may conjure up images of mysterious deals cut beyond public view. Also called simply “dark trading,” it happens when computers serve as matchmakers and bid-and-ask quotations aren’t displayed to all participants. What’s surprising is just how big the dark-trading market has become.

trading in dark 1In the third quarter of 2014, the average daily volume of dark shares was 2.56 billion, accounting for 45 percent of the total average daily share volume in the United States, according to a report from the TABB Group, a financial research and advisory firm. That is up from 42 percent during the same period in 2013, according to the report.

What’s behind the growth? “The proliferation of dark volume is partly because of technological advancement and the creation of multiple trading venues,” said Sayena Mostowfi, senior analyst for equities at the TABB Group and author of the report. “The thinking is if you have the match internally, why would you go to the exchange?”

Assessing the overall impact of dark trading isn’t simple. Connecting computers with other computers might simply seem to be the height of efficiency, and no doubt it has some advantages. But while dark trading can benefit some insiders, it may cost the market as a whole.

For one thing, dark trading has led to greater fragmentation of the domestic stock market, which is now made up of around 300 venues. Only 13 of these are registered exchanges, while the rest are alternative trading systems or broker-dealer platforms, according to a recent paper by Frank Hatheway, chief economist for Nasdaq; Amy Kwan, now a lecturer in finance at the University of Sydney Business School in Australia; and Hui Zheng, a senior lecturer at the same school. This fragmentation has made it more difficult for many traders to find the best prices.

The paper concluded that, on balance, dark trading turns out to raise aggregate transaction costs and reduce the accuracy of prices displayed in traditional trading venues. The paper’s findings would seem to suggest that the more dark trading grows, the less meaningful public stock quotes are. And that possibility is something that all investors should be concerned about.

For the original article from The New York Times, click here