As Summer Temperatures Rise, Dark-Pool Volume Climbs Higher
Traders Magazine Online News, July 18, 2008
Dark pools are on a hot streak. They're tearing through volume records and turning into big-league market centers in their own right.
Goldman Sach's Sigma X dark pool yesterday executed 406 million shares, making it the seventh-largest market center for U.S. equities. That put Sigma X in line behind Nasdaq, NYSE Arca, the New York Stock Exchange, BATS Trading, Direct Edge ECN and the National Stock Exchange. And ahead of all other venues.
Sigma X's volume is up 100 percent over the last seven weeks, according to Rishi Nangalia, head of product development at Goldman Sachs Electronic Trading. "It's a virtuous circle," he said. "We have more volume passing through from more clients and their algos, and as a result of higher fill rates, we get more flow, which in turn further increases the match rates." This surge is taking place against a backdrop of higher equity market volume overall and greater volatility.
Goldman isn't the only broker dark pool breaking records. Credit Suisse on Wednesday logged an all-time high of 210 million shares in CrossFinder, its dark-liquidity pool. Executed volume in the pool grew an average of 30 percent per month this year, according to the broker. Earlier this month, Lehman Brothers executed over 100 million shares in its dark pool for the first time.
Dan Mathisson, head of Credit Suisse's Advanced Execution Services group, noted that his firm and Goldman have "separated from the pack" of several dozen dark pools. "We're hitting that fun part of a crossing platform, the liquidity-begets-liquidity phase," he said.
One reason for the jump, according to Mathisson, is the "network effect" of institutions increasingly accessing dark liquidity through algorithms. Smart-order routing and heat-map-type technology that route orders to "hot" destinations providing fills "lead to a disproportionate increase in the market share of the bigger pools," he said. "Flow is migrating off traditional destinations to destinations that barely existed a couple of years ago."
The National Stock Exchange, the venue just ahead of Goldman's Sigma X, yesterday transacted 217 million shares, making it a distant sixth to its bigger brethren. Displayed markets, including exchanges and electronic communication systems, single-count their executed volume. Dark pools double-count what they cross. The industry's (single-counted) consolidated volume reached 12.3 billion shares yesterday.
Even if Goldman's volume yesterday was an outlier, Sigma X is on a tear. So far this month, the dark pool has executed an average daily volume of 310 million shares (double-counted). In June, the pool's daily average was 233 million, up from 151 million in May. In comparison, in June 2007, Sigma X executed 84 million shares per day.
Consolidated market volume, according to Nangalia, has increased about 25 percent over the last two months. According to Lehman Brothers equity research, overall average daily market volume this year through mid-July, at 7.8 billion shares, represents a 27 percent increase over the same-period average daily volume in 2007.
So far this month, Credit Suisse, the #2 dark pool, has executed a daily average of close to 180 million shares. Its June average daily volume was 148 million, compared with 130 million in May. Mathisson noted that a big contributor to CrossFinder's volume boost is the CrossFinder Retail Network of brokers. "It's a significant part of our growth," Mathisson said. "It's typically relatively uninformed market orders, which is the highest-quality flow you can get. That attracts institutions."
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