Dark pool trading volume made some solid gains in 2008. And two broker-sponsored pools distinguished themselves from the others.
Goldman Sachs’ Sigma X and Credit Suisse’s CrossFinder began to separate themselves from their dark peers. Their respective volumes broke away from other broker-sponsored pools, particularly those of the more traditional, block-crossing variety-ITG’s POSIT, Pipeline and Liquidnet.
“In general, we saw people gravitate to broker-dealer-sponsored dark pools, because Goldman Sachs and Credit Suisse typically have much more order flow than pools like Pipeline and POSIT,” said Dmitri Galinov, director of Credit Suisse’s electronic trading group, AES. “Folks went to dark pools that are cheap, that are fast and that have very liquid flow behind them.”
For the first nine months in 2008, Sigma X and CrossFinder averaged 1.36 percent and 0.91 percent, respectively, of consolidated volume, according to estimates from the consultancy TABB Group. This grew from 0.78 percent and 0.37 percent, respectively, during the same period in 2007.
This year, dark pool vanguards POSIT, Pipeline and Liquidnet averaged just 0.37 percent, 0.20 percent and 0.50 percent, respectively, of consolidated volume over the same period, TABB’s 2008 data showed. This shrunk from POSIT’s 0.59 percent, Pipeline’s 0.35 percent and Liquidnet’s 0.64 percent averaged as a percentage of overall volume for the same period in 2007.
Liquidnet wasn’t concerned with the numbers, though. The firm chases a different type of order flow than the broker-sponsored pools do, said Jay Biancamano, its global head of marketplace.
“We’re a distinctively different beast,” he said. “Our negotiation system is designed for block discovery, size discovery.”
Both Goldman Sachs and Credit Suisse attributed the increases to their pools’ prodigious growth: Orders gravitated to the biggest pools, such as theirs, each said. But they said other factors, including algorithms, helped them achieve that growth.
Goldman Sachs Electronic Trading saw a shift in use toward its liquidity-seeking algorithm, Sonar-and away from VWAP and participation algos-boost its pool volume, said Dave Johnsen, the firm’s vice president of business development for Sigma X.
Sigma X also benefited from its diverse order flow, as well as its pacts with UBS and Morgan Stanley. Back in May, GSET, UBS and Morgan Stanley signed an arrangement whereby each firm’s algos can access one another’s pools.
“Our arrangements with UBS and MS are for reciprocal access, so there’s certainly been an inbound benefit, as well,” Johnsen said. “They have each been good participants in Sigma X: providing quality liquidity and child block orders.”
CrossFinder’s volume rocketed to more than 100 million shares a day this past September, from just 15 million shares per day in September, 2007. Like Sigma X, the firms saw benefits from high amount of internalized flow, in this case by Credit Suisse’s AES unit.
“As overall volume has grown significantly, people just start using more algorithms,” Galinov said. Consequently, because AES generates tremendous flow, it has benefited CrossFinder, he added. In addition, Credit Suisse also invested in improving CrossFinder’s speed and consistency, which paid off, he said.
Additionally, the firm noted that a big contributor to CrossFinder’s volume boost has been the CrossFinder Retail Network of brokers. Retail flow typically consists of relatively uninformed market orders, which are considered high-quality and attractive to institutions.
So while Sigma X and CrossFinder saw their respective market share of total equities trading climb, the traditional block-trading pools saw theirs fall.
This fits in an environment where algo use has increased and consequently average order sizes have shrunk. More block orders split into small pieces will mean fewer trades are happening in the block-to-block space, according to one dark pool exec who spoke on background.
Overall, dark pools’ share of the market for equities traded jumped 33 percent this year through September, despite periodic-even monstrous-volatility. Dark pools averaged 8.3 percent of overall volume through the first three quarters of 2008, compared with 6.2 percent over the same period in 2007, according to TABB figures.
Some of this increase can be attributed to how traders this year reversed a trend regarding dark pools and “volatility-driven volume spikes,” according to Rosenblatt Securities’ most recent monthly report on dark pool volumes.
September and October’s neck-snapping volatility-measuring 30.24 and 61.18, respectively, on the Chicago Board Options Exchange’s Volatility Index, or VIX-produced wide price swings that made trading extremely difficult.
In times of high volatility, traders typically avoid dark pools when trading blocks. They don’t want prices to move against them after a large trade.
But over the summer, as volatility and volume climbed, dark pool activity held its ground, and even grew, the report said. And the pools run by large brokerage houses, in particular, benefited.
Dark pool market share did fall, though, as volatility increased dramatically in September.
According to the report: “The vast majority of today’s dark pool activity occurs in newer, broker- and market-maker-run venues that are open to algorithms, have higher fill rates and trade at average sizes of 225 to 600 shares.”
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