50% volume done off exchange

Discussion in 'Order Execution' started by excrypto, Feb 12, 2021.

  1. excrypto


    zdreg likes this.
  2. zdreg


    GameStop Trading Craze: The Week Underdog Stocks Took On Wall Street
    In just five days, GameStop’s shares soared as much as sixfold. WSJ analyzed how Reddit posts, YouTube videos and tweets by personalities including Elon Musk spread online and fueled a trading craze that turned Wall Street upside down. Photo illustration: George Downs/WSJ
    Behind the shift is the influx of small investors, many of whom have been empowered by zero-commission trading apps and are stuck at home during the Covid-19 pandemic. Online brokerages that cater to individual investors, including Robinhood Markets Inc., send many of their customers’ orders to electronic trading firms such as Citadel Securities and Virtu Financial Inc. VIRT -1.84% These firms typically execute small investors’ orders privately instead of routing them to public markets including the New York Stock Exchange and the Nasdaq Stock Market. The investors often get slightly better price terms from Citadel Securities and Virtu than they would if their orders were sent to exchanges.

    Some analysts worry that the shift away from on-exchange trading could erode transparency. When fewer trades take place on exchanges, there is less information publicly available about the prices that investors are willing to pay for shares. That raises the risk that traders will pay more when buying and get less when selling than they should.

    “We’re definitely in an area where the level of off-exchange trading raises concerns,” said Justin Schack, a partner at Rosenblatt. “Once you start to see half or more of activity taking place away from public markets, you have to ask: What is this doing to price discovery and market quality? Are we getting to levels that hurt the market?”

    Do you think the shift to dark trading will harm U.S. stock markets? Why or why not? Join the conversation below.

    Off-exchange trading isn’t new. For years, institutional investors have bought and sold shares on private venues known as dark pools, while brokerages have sent small investors’ orders to internalizers, as the retail-trading platforms run by Citadel Securities and Virtu are known.

    Such firms pay brokerages for the right to trade against their customers’ orders, a practice that has drawn fresh scrutiny since the GameStop frenzy. Both internalizers and dark pools must release data on each trade after execution. But unlike exchanges, neither dark pools nor internalizers are in the business of displaying price quotes, a key ingredient in allowing the broader market to see what a stock is worth and how its price is moving.

    Other countries take a stricter approach. In Canada, for instance, all trades must be executed on exchanges. In the European Union, a 2018 regulatory overhaul sought to push more stock trading onto exchanges, though its results have been mixed.

    Online brokerages that cater to individual investors such as Robinhood send many of their customers’ orders to electronic trading firms.
    Firms that run off-exchange trading platforms say the current level of dark trading in the U.S. isn’t a problem. For one thing, since many of the most actively traded stocks have share prices of just a few dollars, the percentage of off-exchange volume is lower when measured in dollars than when measured in the number of shares traded. In dollar terms, around 40% of trading volume is executed outside exchanges.

    Executives at electronic trading firms, as well as analysts and academics, stress that individual investors benefit from having their orders sent to internalizers because of the better prices. “In terms of the ecosystem and who’s ultimately benefiting, it really is the retail investor,” Virtu Chief Executive Douglas Cifu said on an earnings call Thursday.

    A pre-markets primer packed with news, trends and ideas. Plus, up-to-the-minute market data.

    Still, some data suggest that the growing heft of internalizers might be hurting the rest of the market by depriving institutional investors of access to liquidity. When institutional investors buy or sell stocks such as Apple Inc. or American Airlines Group Inc. with a high degree of individual activity, their transaction costs are more than three times higher than with stocks for which less than 10% of trading volume comes from individual investors, the trading-analytics firm GTA Babelfish said in a recent report.

    GTA Babelfish—which advises mutual funds, pension funds and other institutional investors on how well they are executing trades—measured transaction costs by examining the degree to which a stock’s price moved up or down after a fund manager began buying or selling shares, a metric closely followed on Wall Street trading desks.

    “These transaction costs are very insidious,” said GTA Babelfish partner Linda Giordano. “It’s something that eats into your overall return. And you’re doing this over and over and over again, every time you’re trading.”

    Retail Trading Mania
  3. maxinger


    too much garbage nonsense on the internet.

    Look at GME chart.

    around the end of Jan 2021, the volume was around 300 million shares traded.
    Now it is just a meager 13 million shares.
    So don't bother whether it is dark or bright trading.
    qlai likes this.
  4. qlai


    Depends on what you are using it for I guess. As long as off-exchange trades are reported real-time, still useful gouge of immediate activity.

    But things are not as obvious as they used to be when you could count volume traded on the bid vs volume traded on the ask.
  5. Robinhood (an similar retail) investors, when entering limit orders, not marketable, will their order still rest in the lit market on a public exchange, or will their order be sent to Citadel or another marketmaker as well, who will only fill it once the limit order is marketable (and it benefits Citadel)?
  6. One downside the article does not mention is that the more retail order flow go off-exchange, the less profitable on-exchange market making will be, thus less competition, thus wider spreads. So while it seems retail investors get better prices off-exchange, in fact they do not, since their prices are measure to on-exchange prices, where prices get worse the less flow goes there.
  7. excrypto


    Thx dude. Appreciate it.