Why Volume Is Moving into Dark Pools

There has been a major shift in stock trading volume over the last several years. Traders are moving to off-exchange venues, known as dark pools, in record numbers. This change has created severe repercussions within the traditional exchanges and has forever altered the way traders conduct business.

The public exchanges are feeling the transformation in their bottom lines. NYSE Euronext’s first-quarter profit for 2012 plunged by 44%. Nasdaq OMX, the second-largest U.S. stock exchange, has seen a decline in volume of more than 20% since the turn of the century.  Statistics compiled by the Tabb Group indicate that the share of trades executed off of public exchanges has increased from 26% to 32% since 2008.

The public exchanges are not taking this loss of volume and revenue lightly. They are fighting back by lobbying for regulators to closely examine dark pools. Duncan Niederauer, CEO of the New York Stock Exchange, explained his exchange’s stance to Bloomberg: “After the financial crisis, we wanted to create a market with more transparency. Instead it’s gotten darker and more opaque.” Eric Noll, an executive vice president at Nasdaq, told Bloomberg, “Dark trading has real value for investors, however we believe in the primacy of the lit market where all investors, on and off exchange, ought to benefit from unimpaired transparency and price discovery.”

The reasons traders are moving to dark pools are many. Interestingly, it is sometimes the public lit exchanges’ own regulations that push volume into off-exchange venues. Other reasons include anonymity, the ability to move large blocks of shares without moving the price or alerting other traders, lower fees/costs, and the ability to conduct high-frequency trading and other strategies off the public exchanges. While this move away from the public exchanges can adversely affect price discovery, new technology has made it possible for retail traders to access the liquidity provided by dark pools.

Once strictly the province of institutional and large hedge fund market players, a few innovative and cutting-edge brokers, such as Lightspeed, provide access to dark pools for the retail and professional trader. This access provides every trader the ability to trade the dark liquidity of off-exchange venues.  Having the opportunity to trade within dark pools can provide traders the liquidity they need to use profitable strategies, not to mention price improvement.

For example, Crossfinder Plus: Lightspeed Trader now has connectivity to Credit Suisse AES Crossfinder+. Crossfinder+ is the Credit Suisse AES smart dark router that contains dynamic smart routing logic to direct your order to the destinations with the most liquidity in the name that you are trading. This tactic locates liquidity among a broad and expanding list of dark venues with continuous crossing capabilities. Crossfinder+ will spread your full order over multiple destinations, constantly rebalancing based on a dynamic liquidity heat map. Crossfinder+ orders are never displayed, and Crossfinder+ can be used in 3 different modes. In addition, Lightspeed offers an order type known as “Dark Assault.” This feature enables traders to access liquidity at the top of U.S. dark pools.

It’s exciting that brokers such as Lightspeed are rapidly leveling the playing field between institutional and retail traders. Now retail traders can get price improvement, anonymity, and lower fees/costs by accessing dark pools just like the big boys.

Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.

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