Dark Pool Executives Say Trading Evaporated During May 6 Stock Market Drop
When orders to sell stocks were matched at pennies a share as markets plunged on May 6, they weren’t being executed on dark pools, executives from three of the private trading venues said at a conference today.
Investors stopped using the venues during the height of the selloff, when $860 billion was erased from U.S. equity values over 20 minutes, according to Henri Waelbroeck, director of research at Pipeline Trading Systems LLC, Vlad Khandros, a corporate strategy executive for Liquidnet Holdings Inc., and Kevin Foley, chief executive officer of Aqua Securities LP.
Regulators are examining what caused some shares to fall 90 percent or more that day as orders flowed to electronic platforms with few if any buyers. U.S. exchanges agreed on May 6 to break trades that were 60 percent or more away from their price at 2:40 p.m., when the selloff intensified. Transactions in 326 securities were canceled.
“During the volatile period, we didn’t execute anything,” Waelbroeck, whose firm handles large trades for mutual funds, hedge funds and brokers, said at a conference on block liquidity in New York. The impact of rapid declines is smaller on systems “that automatically impose limits” on prices, he said.
The executives blamed market orders, or instructions to sell at whatever the current price is in the market, that were executed on other venues. Had investors or their brokers specified the minimum amount that would be accepted to sell shares, “the day’s headlines would have been very different,” Khandros said.
Liquidnet operates the world’s biggest automated platform for larger trades, with an average execution size on its main platform last month of 45,900 shares.
Foley called instructions to sell at any price “naked market orders” and said they should never be used. Aqua runs a dark pool that enables mutual funds and other money managers to interact automatically with mid-tier and regional brokers.
The Securities and Exchange Commission has said it is examining market orders in the plunge on May 6 and the potential use of collars to limit the price at which executions occur.
Brokers who sent market orders to exchanges are likely to come under regulators’ scrutiny, said Tim Mahoney, chief executive officer of Bids Trading LP, a dark pool. The company runs a joint venture with NYSE Euronext that enables orders at the New York Stock Exchange to interact with buy and sell interest in the Bids dark pool.
There was a “bit of user error” by investors relying on market orders to find executions on exchanges, Mahoney said. His firm had record volume day on May 6, with about 45 million shares changing hands, he said.