VP Market Structure Analysis
Rosenblatt Securities Inc.
New York +1 212 607 3100
Dublin +353 1 855 9125
“Lonestar, where are you out tonight?
This feeling I’m trying to fight
It’s dark and I think that I would do anything
For you to shine down on me”
—Lee Alexander, 2002 (From the Norah Jones album “Come Away With Me”)
The share of overall US equity trading executed by dark pools fell slightly in September, as the global credit crisis deepened and a spasm of once-in-a-generation volatility began to grip the markets. The 18 dark pools we track collectively posted average daily volume of 953 million shares daily during the month, up 46% from August and the group’s highest-ever monthly ADV. But consolidated volume grew at an even faster, 53% clip, reaching a whopping 11.3 billion shares per day. The latter half of the month saw a string of record and near-record trading days, with an all-time-high 18.7 billion shares changing hands on September 18 and an average daily volume of 16.0 billion for the week of September 15. The CBOE’s Volatility Index posted an average close of 30.2 in September, up 46% from just 20.7 in August.
Considering the huge increases in consolidated volume and the VIX, the slight decline in dark pools’ market share is not all that surprising, even if it does counter a recent break in the historical relationship between volatility-driven volume spikes and dark pool activity. Historically, high volatility has curbed dark pool volumes. Fast, wildly swinging markets can cause institutions to temporarily suspend trading — especially the crossing of big blocks in dark pools — out of fear that prices will move against them after trading a large quantity of shares. Those that must trade often have some urgency behind their orders and tend to seek the certainty of execution on displayed markets (the light shining down on the dark, if you like), which is dominated by high-frequency firms that don’t play much in dark pools.
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