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.
Both Knight Link and GES gained ground in recent months because their affiliations with market-making operations enabled them to execute more flow. Justin Schack, vice president in charge of market structure analysis at Rosenblatt, points out that a benefit of the big pools affiliated with market makers is that "they have continuous liquidity and order flow doesn’t have to sit there and wait for a match." He added that both GES and Knight Link are also fast, accessible through algorithms, and offer attractive pricing.
Knight Link gives about three-dozen brokers and other entities a way to access the firm’s off-exchange liquidity, which is generated by its large market-making business. Jamil Nazarali, managing director in charge of Knight’s electronic trading group, noted that Knight Link’s growth over the last few months "has come from new clients and from expanding use by clients who have had a good experience with high fill rates and low cost since turning on [Knight Link]."
GES matches orders from two-dozen broker-dealers against two-sided liquidity from GETCO, which operates a separate broker-dealer owned by the same parent company. GES is registered with the Financial Industry Regulatory Authority and is an alternative trading system. Unlike most traditional dark pools, GES and Knight Link do not allow customer orders to rest in their pools. Knight also has another pool that operates like a traditional pool, called Knight Match, but it doesn’t provide volume figures for those executions.
Goldman said Sigma X volume has surged in recent months because of broad changes in the industry that have led more broker-dealers to use its dark pool. "The fact that we’re up and running and executing every day has helped us gain market share," said Rishi Nangalia, head of business development at Goldman Sachs Electronic Trading, which is responsible for Sigma X. "This has led to some new broker-dealer relationships."
Credit Suisse’s Galinov said his firm’s pool has increased its market share in recent months because customers are using CrossFinder more and because of industry developments. "The fact is that fewer players exist," he said. "The flow has been redistributed among the firms still standing, and their dark pools have benefited greatly over the last several months."
At the same time, Goldman’s Nangalia added, high-frequency players operating across a range of dark pools have contributed to increased volumes at some pools. "Volumes have gravitated toward flow from electronic market makers," he said. He noted that changes in the type of flow in dark pools can affect the market share of those pools.
Morgan Stanley offered a different reason for its recent growth. In February, the dark pool averaged over 38 million shares, up from 27 million shares daily in January. Andrew Silverman, head of electronic trading distribution at the firm, said volume increased because customers are increasingly differentiating between the many pools they can access. Unlike some dark pools, he said, MS Pool does not send out electronic indications of interest about liquidity residing within its walls and does not accept immediate-or-cancel orders. Both outgoing indications and incoming IOC orders, he said, could result in information leakage for clients working large orders.
Silverman added that MS Pool also has a mandatory resting time and a median resting time requirement for orders placed in the pool, which discourage traders from hunting for order information in MS Pool. Algorithms, however, can pass through MS Pool on their way to the market.
Citi, UBS and LeveL ATS, a dark pool consortium, have also grown in recent months. The two broker pools have augmented their market share of expanding dark pool volume over the last year. Citi Match executed 41 million shares in January, while UBS accounted for about 35 million shares, according to Rosenblatt’s estimate. LeveL’s ADV was 49.9 million in January. LeveL, like Knight Link and GES, offers brokers low-cost executions.
