The Hidden World of Stock Trading
A quiet revolution is taking place in the world of stock trading. For the first time on record, the majority of trading in US stocks is now happening outside traditional exchanges. This shift towards off-exchange trading is a significant development, with far-reaching implications for the market.
The Rise of Dark Pools
Off-exchange trading, which occurs internally at major firms or in alternative platforms known as dark pools, is on track to account for a record 51.8% of traded volume in January. This marks the fifth consecutive month of record-breaking activity, with hidden trades making up more than half of all volume.
A Permanent Shift?
According to Anna Ziotis Kurzrok, head of market structure at Jefferies, this trend appears to be developing into a longer-term shift, potentially becoming a permanent feature of the market. This raises important questions about the future of market activity and how it will be regulated.
Implications for Market Efficiency
As more trading moves off-exchange, there is a risk that pricing on and off-exchange could become less efficient. Larry Tabb, head of market structure at Bloomberg Intelligence, notes that theoretically, the more trading that goes off-exchange, the fewer orders there are on-exchange competing to determine the best price.
The Role of Retail Investors
The surge in off-exchange activity corresponds with increased volumes in stocks worth less than $1, which are typically traded by retail investors. This suggests that the shift towards off-exchange trading is being driven, at least in part, by the growing presence of individual investors in the market.
Alternative Trading Systems
The number of off-exchange venues offering an alternative, anonymous way to process trades is growing. These alternative-trading systems (ATS) use different mechanisms to match buyers and sellers without displaying the desired price on a public exchange. This helps institutional investors limit information leaking to the market and adversely affecting prices.
A New Era of Trading
As the market continues to evolve, it’s clear that a new style of trading is emerging. Joe Saluzzi of Themis Trading notes that bigger institutions seem to have a better experience where they can command more value. As the landscape continues to shift, it will be important to monitor the implications for market efficiency and the role of traditional exchanges.
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