The shadowy world of dark pools is about to get a whole lot darker. Credit Suisse (CS) has announced it will no longer make public any data related to its Crossfinder platform, by far the biggest among a growing group of private trading venues known as dark pools. The investment bank on April 19 said it will stop sending data to Tabb Group or Rosenblatt Securities, two research firms that publish monthly statistics about dark pools. That data is pretty much the only clear window the public has into these private venues, which over the last few years have siphoned trading activity away from public exchanges such as the New York Stock Exchange (NYX) and Nasdaq (NDAQ).
Now, an increasingly important segment of the market threatens to become even more opaque than it already was. Unlike public exchanges, dark pools have no obligation to post pricing or trading-volume information, which is, of course, part of their appeal to investors seeking either better prices or to mask their activity from other market participants.
Established originally as private destinations for institutional investors looking in part to hide their big orders from speed traders on exchanges, dark pools over the years have attracted an increasingly diverse group of players. The pools now function almost as quasi exchanges themselves—with one big catch: They’re not subject to the same rules as public exchanges.
In February, dark pools matched an average of 908 million shares per day, accounting for roughly 14 percent of all U.S. stock trading volume, according to data from Tabb. Crossfinder matched 123 million shares a day, or about 14 percent of all dark pool trading activity. When combined with the amount of trades that get internalized by wholesale brokerages, the amount of trading that takes place outside public exchanges in the “unlit market” hit 36 percent in February, up from about 32 percent for all of last year, according to data compiled by Bloomberg.
In Tabb’s March data, posted today, Crossfinder is conspicuously absent, though its footprint is practically visible in the void it leaves behind. The data now show dark pool trading volume at 702 million shares. The decline seems to be part of a bigger trend of lower trading volumes overall in March, but Crossfinder’s absence probably accounts for at least part of it.
Matt Simon, a senior analyst at Tabb, says losing Crossfinder’s data pokes a big hole in his firm’s measurement of dark pool activity. “Not having Crossfinder will hurt our ability to offer a clear picture of dark pools,” he says. “One of the things we don’t do is estimate statistics. So without willing participants of the community, we have no intimate knowledge of that space.” (Tabb and Rosenblatt obviously have a business interest in dark pools giving them data, which the firms then market to clients.)
Credit Suisse declined to comment. According to Simon, the investment bank felt that providing stats about Crossfinder was threatening its competitive advantage and revealing too much information about its operations and client behavior. For a time, publishing that data was a way for dark pools to sell themselves to investors. The bigger they were, the better their execution algorithms were perceived to be. Now that dark pools attract a large chunk of all trading, that calculus seems to have changed Credit Suisse, especially as dark pools have become a target of ire for the exchanges, as well as other critics who say the U.S. markets are far too opaque and fragmented.
The announcement by Credit Suisse comes just days after executives of public exchanges joined forces to lobby the Securities and Exchange Commission to impose harsher restrictions on dark pools. According to Adam Sussman, director of research for Tabb Group, dark pools no longer see much benefit in telling people what they’re up to. “When you realize ‘going out loud’ is only getting you burned, you go dark,” Sussman wrote in a post on Tabbforum.com.
Given that dark pools’ entire advantage is predicated on being private, it wouldn’t be that surprising if eventually they all stop reporting data. “Our instinct is that there will be others that will follow suit,” Simon says. “The next logical are the next-largest.”
After Crossfinder, Knight Capital Group’s (KCG) Knight Link and Barclays’s (BCS) LX are the next-biggest dark pools by volume. Goldman Sachs’s (GS) Sigma X and UBS’s (UBS) ATS round out the top five. Representatives at all the firms either didn’t reply to requests for comment or declined to comment.
Sang Lee, a market analyst for Aite Group, says he was surprised by Credit Suisse’s move and that many dark pools still see publishing their data as a way to legitimize their activities as private trading venues in the eyes of regulators. “I’m skeptical that other firms will follow, because it would only create more regulatory scrutiny on them,” he says. “The exchanges would just go to the regulators and say, ‘Hey, look, now the biggest guys are refusing to share any data.’” Given all the criticism over the lack of market transparency, Lee says he believes the SEC will eventually require dark pools to share more data.
Last year, NYSE launched an initiative called the Retail Liquidity Program, aimed at competing with dark pools by temporarily circumventing SEC regulations and offering slightly better prices. Other exchanges including BATS followed suit. Those plans have been criticized by some, who argue that in order to better compete, the exchanges are having to wade into the dark themselves. In a twist of irony, a glitch installed into one of the firm’s trading codes aimed at interfacing with NYSE’s RLP was at the heart of what blew up Knight Capital last August—on the first day the RLP was live.