VIEWS: 147 PAGES: 12 CATEGORY: Market Research POSTED ON: 8/25/2009
Rosenblatt Securities speaks to the trends in dark pool liquidity with the expectation of what is to come in 2009.
Dark Pool Trends: 2008 in Review A Year of Growth and Transformation January 29, 2009 Joe Gawronski Justin Schack Rosenblatt Securities Inc. Dark Pools: 2008 in Review The Top 8 of ’08: Trends That Shaped the Dark-Pool Landscape 1. Impressive Volume Growth • Driven by new venues, internalization and buy-side demand Despite pundit predictions ECN comparison flawed Not inherently evil, but can degrade execution quality and thus require disclosure, monitoring and opt-out Exchange routing/solicitation to and from dark pools 2 5. Algo-Friendly Pools Dominated • • Fundamentally transformed space Response to losing market share to fast, cheap, small-size pools run by brokers and market-makers Addressing buy-side frustration over declining average trade size in nondisplayed venues Likely to accelerate in 2009 Capitalizing on MiFID rules that open incumbent exchanges to competition for first time 6. Block Venues Court Algo Flow 2. No Consolidation of Pools • • • 3. IOIs and Other Linkages Exploded 8. Algo-Friendly Pools Pursued Blocks • • • 4. Dark and Light Joined Forces • 10. Dark Pools Invaded Europe Dark Pools: 2008 in Review Impressive Volume Growth in 2008 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 3 Dark Pools as % of Consolidated Volume Dark Pools: 2008 in Review 4 Why Consolidation of Dark Pools Didn’t Occur, and Likely Won’t • Flawed Comparison With ECNs in late 1990s/early 2000s • Category dominated by broker internalization pools that have no incentive to combine • Independent pools charge relatively high commissions and not subject to margin pressure that drove ECN consolidation • A few weak pools may go out of business or sell, but we won’t see ECN-like winnowing through M&A Dark Pools: 2008 in Review Use of IOIs and Other Linkages Exploded, in Part to Address Fragmentation • IOIs and IOCs • Outbound IOIs — solicit flow into dark pools • Inbound IOIs — alert pools to external matches • IOCs — used to respond to inbound IOIs 5 • Dark Pool Aggregators • Problems: latency, adverse selection, restriction from “juiciest” flow • Linkages and Reciprocal Algo Access • Goldman-Morgan Stanley-UBS • Credit Suisse-Instinet Dark Pools: 2008 in Review Dark and Light Markets Joined Forces • NYSE Arca, Nasdaq and BATS — dark routing/solicitation programs • Follows on success of Direct Edge ELP program • Helps dark pools broaden reach to increase match rates • Allows exchanges to cut costs • Routing unmatched orders to other exchanges/ECNs = 30 mil fee • Routing unmatched orders to certain dark pools = free/de minimis charge 6 Dark Pools: 2008 in Review Broker/Market-Maker and Exchange Pools Gained Market Share at the Expense of Independent/Agency Pools 1000 900 800 700 600 500 400 300 200 100 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT Consortium NOV DEC 7 Average Daily Volume, Millions of Shares Broker/Market-Maker Exchange Independent/Agency Dark Pools: 2008 in Review Change in Share of Dark Pool Volume by Category Consortium 8% Consortium 7% 8 August Independent/ Agency 24% Broker/ MarketMaker 58% Exchange 10% Consortium 8% Independent/ Agency 14% Exchange 15% Independent/ Agency 18% Broker/ Market-Maker 64% Exchange 11% Broker/MarketMaker 63% April December Dark Pools: 2008 in Review Growth of Individual Pools: Algo-Friendly Venues Dominate 9 Dark Pools: 2008 in Review Convergence of Block Crossing and Algo-Friendly Approaches: A 2008 Trend That Will Be Even Bigger in 2009 • Block Pools Courting Algo Flow • Response to stagnating block volumes/losing share to algo-friendly pools • Liquidnet H2O/Supernatural • Pipeline Algorithm Switching Engine 10 • Algo-Friendly Pools Courting Blocks • Response to buy-side frustration with declining size in dark pools • Goldman point-in-time cross, Block Signal product • LeveL block order type planned; Instinet block pool forthcoming • New York Block Exchange • Joint venture of BIDS and NYSE Euronext — launched 1/29/09 • Integrates block orders with public and reserve books on NYSE Dark Pools: 2008 in Review Convergence in Action: As Dark Pool Landscape Transformed, Volatility Had Less Effect on Volumes, But Extreme Levels Still A Drag 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 11 Dark Pools as % of Consolidated Volume VIX Average Close Dark Pools: 2008 in Review Dark Pools Invaded Europe • EU’s MiFID opens incumbent exchanges to competition • Some pools in Europe for many years • Liquidnet, Posit • Wave of 2008/pending 2009 launches to capitalize on MiFID • NYFIX Euro Millennium • Knight Link • ICAP BlockCross • Incumbents and challengers alike recognize power of light-dark 12 integration • Turquoise • NYSE Euronext SmartPool
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