Low volatility begets more off-exchange trading. So much so, that now over 35 percent of all U.S. equity trading is occurring off the public exchanges.
Wow.
Credit Suisse’s Trading Strategy Group reported that in August off-exchange trading hit a monthly average of 36.45 percent in August (month-to-date). In July that figure was 37.16 percent.
One year ago, off-exchange volume was at 36.76 percent.
Off-exchange trading, according to the bulge firm’s research, hit a high monthly average of 38.3 percent in June. It was during June that volatility was also at its lowest monthly average.
In comparison, in June 2013 off-board trading stood at 34.48 percent.
The rise in off-board or off-exchange trading has garnered a lot of attention – from lawmakers, to exchange officials and to authors – as many feel the rise in trading away from the public exchanges harms the market and best execution.
Credit Suisse measures and defines off-exchange trading as those trade executed at dark pools, other alternative trading systems and ECNs, retail wholesalers, and broker-dealer block trading desks. The broker operates its own dark pool, Crossfinder.
The broker pointed out that the trend of rising levels of off-exchange trading matches the trend of lower market volatility. When volatility is low, there is less risk in trading and consequently less urgency to get a trade done and the best price tends to be found off-board. Conversely, when volatility is high, there is more risk and urgency to get a trade done and exchanges, with their designated market makers and other participants with their two-sided markets at the ready, are the best place to trade.
Based on data from FINRA, dark pools are around 33 percent of off-exchange volume, or 14.6 percent of all U.S. volume.
