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Why Some Dark Pools Are Increasing Their Volumes
Traders Magazine Online News, March 13, 2009
Some dark pools are growing faster than others. Overall, dark pool volume appears to be increasing as a percentage of consolidated market volume, but a handful of pools are making more headway. The growing pools run from Goldman Sachs's Sigma X and Morgan Stanley's MS Pool to Getco Execution Services.
According to Rosenblatt Securities, which tabulates dark pool volume monthly, dark pools were 8.75 percent of consolidated volume in January, in line with market share in November and December, but several percentage points higher than their share earlier in 2008. However, data from the earlier part of last year is incomplete since some pools declined to publish their numbers.
In both December and January, the four largest pools were Knight Capital Group's Knight Link, Sigma X, Getco Execution Services and Credit Suisse's CrossFinder, in that order. Those pools represent more than half the total reported dark pool volume.
Last month, the order of the largest pools shifted. Goldman's Sigma X is back in the top spot, after being elbowed aside by Knight in October. Sigma X told Traders Magazine it transacted 156.3 million shares (using Rosenblatt's methodology), up from 128 million in January and its record ADV of 159 million shares last September. The earlier months' numbers are based on Rosenblatt's count. All the dark pool numbers in this article are single-counted.
GES, which is just a year old, last month hit 139.7 million shares daily, according to the firm, up from 86.1 million in January. Knight Link traded 135 million shares, based on Rosenblatt's methodology, Knight said. In January, its ADV was 137 million shares. Credit Suisse's CrossFinder, which saw its best month ever in February, executed 103.6 million shares daily, up from January's 81.4 million. (Rosenblatt has not yet issued its February dark pool volume report.)
In an effort to standardize dark pool volume figures, Rosenblatt single-counts executions and excludes shares executed externally. Knight said Knight Link's February ADV was 168 million shares when executions that took place in other venues, such as other dark pools, are added into the mix. About a third of Knight Link's reported executions, according to Rosenblatt, are in micro-cap and nano-cap names, which tend to have lower stock prices and therefore require more shares to trade the same dollar amount. None of the dark pools execute Pink Sheets and OTC Bulletin Board stocks.
Goldman, Credit Suisse and GES have all seen record volumes in their pools in March, in keeping with higher consolidated equities volume (Knight did not comment on its March volume). Credit Suisse has also logged a big increase in volume after releasing "new ultra-low-latency matching technology" on March 1 and moving the matching engine to a new data center, said Dmitri Galinov, a director in Credit Suisse's Advanced Execution Services group.
However, none of these volume increases means these pools are taking flow from the traditional block crossing networks. Executions and market share typically depend on the roster of clients and flow in particular pools. Liquidnet, Pipeline Trading Systems and ITG's POSIT Alert, which execute blocks, did not increase their market share over the last year, but continued to execute block orders. Other pools, in contrast, proved more welcoming to non-block algorithmic flow, including flow from high-frequency players. According to research firm Aite Group, high-frequency trading now represents 60 percent of ADV in U.S. equities, and that type of flow has increased its presence in dark pools in recent months.
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