Dark Pools Take Record Share of Trading, Rosenblatt Says

Dark pools accounted for a record share of U.S. equity trading in January as a decline in market volatility steered more business to off-exchange venues, according to a report from Rosenblatt Securities Inc.

Dark pools, broker-operated private venues that don’t display orders publicly, accounted for 14.3 percent of U.S. equity volume last month, up from 13.3 percent in December, the report tracking 19 venues showed yesterday. Barclays Plc’s LX displaced Goldman Sachs Group Inc.’s Sigma X as the second-largest U.S. dark pool in January, the data show. Credit Suisse Group AG’s Crossfinder has remained the largest dark pool since May 2009, the report said.

The portion of U.S. stocks traded in dark pools has shown a “strong inverse correlation” with the Chicago Board Options Exchange Volatility Index since the Standard & Poor’s 500 began to recover from a 12-year low in 2009, Justin Schack, a New York-based managing director of Rosenblatt, wrote in the report. When volatility is low and prices are more stable, traders can be more patient in executing their orders, and are more likely to use off-exchange venues.

“That effect was back in force last month after fading in the fourth quarter,” Schack wrote.

The VIX, which measures the cost of using options as insurance against declines in the S&P 500, slumped 21 percent in January. The S&P 500 rallied 5 percent during that month as U.S. lawmakers agreed on a compromise on taxes and amid better-than-estimated corporate earnings.

The average dark pool trade size was 221 shares in January, down from a high of 443 in March 2009, according to Rosenblatt. Hidden orders in dark pools and exchanges made up 18.9 percent of all U.S. equities volume.

The average daily volume of Credit Suisse’s Crossfinder increased 18 percent in January from the previous month to 120.9 million shares. Barclays LX’s average daily volume rose 14 percent from December to 90.8 million shares. Goldman Sachs’s Sigma X recorded an 8.8 percent increase in average daily volume from the previous month to 90.3 million shares, the report showed.