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Fewer Block Shares Traded in Networks During Big Downturn
Traders Magazine Online News, December 5, 2008
Operators of block crossing networks say they are unfazed by fresh data that suggests that trading in size fell out of favor during the recent extreme volatility in September and October.
Traditional block-trading dark pools offered by Liquidnet, Pipeline Trading Systems and Investment Technology Group saw their market share for those two months drop 39 percent, compared to their average during the previous eight month period -- January through August.
Liquidnet, Pipeline and ITG collectively averaged .67 percent of overall market volume in September and October, against 1.1 percent they averaged from January through August, according to dark pool volume estimates the consultancy TABB Group supplied Traders Magazine.
Collectively, their volume dropped to 70.8 million shares per day, single-counted, in September and October. This compared to 75.7 million shares a day, single-counted, they traded the prior eight months, TABB data showed.
Still, dark pool operators say the numbers don't tell the whole story, and that they can still claim the mantle as the dominant venue for block trading without leakage.
Pipeline saw record volume days in its block market in October, in the very heart of the volatility, according to Alfred Berkeley, its chairman. About 85 percent of Pipeline's volume consists of execution sizes that average around 50,000 shares. Pipeline averaged 14 million shares a day for September and 17.9 millions a day in October-single counting both sides as one share.
Liquidnet said its number of prints above one million shares more than doubled in September and October from the previous eight months.
The firm averaged almost 50 such prints during the two months, including a Liquidnet record 59 in September, said Vlad Khandros, with the firm's corporate strategy group. From January through August, Liquidnet averaged almost 24 prints of more than one million shares.
Average daily block volume for Liquidnet in October reached 32 million shares, which is a bit higher than September's average daily volume of 30.65 million shares, TABB reports. All numbers are, again, single counted.
In an email response to questions about trading blocks in dark pools in extreme volatility, Chris Heckman, ITG's head of U.S. sales and trading, said these market conditions make clients aware of the opportunity costs associated with trading blocks.
"Our analysis has shown that trading opportunistically in this type of environment can help clients manage tough market conditions and lower their trading costs," Heckman said. "One of the benefits of using a system like POSIT Alert during volatile times is the ability to find blocks efficiently without exposing your order to market risk."
ITG releases its dark pool volume quarterly. TABB takes the data and determines a monthly breakdown. In September, ITG averaged 22 million shares a day, single counted, TABB figures showed. For October, it averaged 25 million.
Over the past two years, the majority of dark pool growth has come from the "newer, algorithm-friendly and smaller-sized group of pools that are typically run by brokers," said Justin Schack, a market structure analyst at Rosenblatt Securities.
This growth started before-and happened independent of-the volatility, Schack said. But it was exacerbated by the volatility.
"In a really fast-moving market," he said, "you don't want to be out there in a dark pool hoping that you're going to find a natural counterparty for a really big-sized trade because the market could swing against you while you wait."
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