Swiss banking institution Credit Suisse has stopped voluntarily disclosing the amount of trading volume on its Crossfinder platform, the world’s largest dark pool, highlighting the debate over the transparency of U.S. equities markets. Last year, FXCM entered into a joint venture with Credit Suisse and a newly established ECN under the FastMatch designation.
While FastMatch is packaged as an ECN, in terms of its operation it is really a pricing engine whose original technology was initially used for the equity world. Although equity trading is centralized with an exchange system, the order flow is fragmented with numerous ECNs operating around the main order books. This led to the creation of trading platforms that can not only send orders to the ‘top of book’ but distinguish the best venue tat which to execute an order.
Dark pools have shown considerable increases in volumes in recent times, North America’s increase being a particularly firm example of the popularity of using dark pools as executing venues. Last year, equities volume on dark pools in the United States was at record levels, and technology companies such as FlexTrade began offering dark pool access to FX participants.
Agency brokerage Rosenblatt Securities and research and advisory firm Tabb Group, which both publish dark pool reports, said on Friday that Credit Suisse had stopped providing the data. Tabb Group have been monitoring the regulatory standing on HFT in North America and the company’s CEO Larry Tabb attended the CFTC Public meeting on HFT in March 2012 in an observational capacity.
“We’re disappointed with Credit Suisse’s decision, but respect that the firm must ultimately do what it believes is best for its business,” said Rosenblatt’s Justin Schack.
Credit Suisse spokeswoman Katherine Herring declined to comment.
Dark pools are private electronic trading platforms where buyers and sellers remain anonymous and their orders are hidden until executed. The trading venues were originally aimed at minimizing the market impact of large institutional orders.
A very public debate about the effects of dark pools on U.S. markets has been playing out over the past few months between several executives from U.S. exchanges and Credit Suisse’s head of U.S. equity trading, Dan Mathisson.
The stock markets say off-exchange trading has grown 15 percent in the last five years to over 35 percent of all trading, and that the average dark pool order size has fallen to levels in line with orders on exchanges.
The growth of off-exchange trading has creating wider trading spreads, more intraday volatility, and made the market more opaque, the heads of NYSE Euronext (NYX.N), Nasdaq OMX Group (NDAQ.O), and BATS Global Markets argued in a meeting with the U.S. Securities and Exchange Commission on April 9.
“We don’t believe making things even darker is the answer to the transparency issues presented by dark trading,” NYSE spokesman Rich Adamonis said on Friday. Nasdaq and BATS declined to comment. Most, but not all, dark pool operators supply the voluntary data to Rosenblatt and Tabb.
In the meeting with the SEC, the exchanges pointed to rules implemented in Canada in October requiring dark pools to offer significant improvement on publicly quoted prices, or to require a minimum size threshold for off-exchange orders. Australia is considering similar rules, which have resulted in a 25 percent decline in the quoted spread in Canada, the exchanges said.
There are around 50 dark pools in the United States and 13 stock exchanges.
Dark pool proponents say the competition the venues provide has kept trading prices on exchanges in line, and that if dark pools did not exist, trading prices would likely be much higher.
Mathisson has also recently pointed out in an editorial in Traders Magazine that many of the orders executed on exchanges are “hidden” and closely resemble those on dark pools.
Some of the largest U.S. dark pools are run by banks that are also some of the exchanges’ largest customers. Other dark pools include Morgan Stanley’s (MS.N) MS Pool and Citigroup Inc’s (C.N) Citi Match.
SEC Chairwoman Mary Jo White, who was sworn in last week, said in her Senate confirmation hearing in March that the agency should continue exploring the market effects of dark pools, along with other issues, including the effects of high-frequency trading and the proliferation of order types on exchanges.
Tabb’s Adam Sussman was not immediately available for comment, but said on Tabb’s website the firm would continue to estimate the size of off-exchange trading.
“Frankly, our estimate will not be as accurate as it was in the past, because we will be missing the largest dark pool,” he said. “But we still feel it is important for the industry to continue to try to measure these numbers. At least until regulators feel the same and put in place a better way for the industry to measure the volume and impact of different trading mechanisms. We are not holding our breath.”