Most US Trading Activity Now Happens Off-Exchange
For the first time on record, the majority of all trading in US stocks is now consistently occurring outside the country’s exchanges, according to data compiled by Bloomberg. This off-exchange activity, which includes internal trades within major firms or alternative platforms known as dark pools, is expected to account for a record 51.8% of traded volume in January.
Off-exchange trading has been a growing feature on Wall Street for years, but public venues such as the New York Stock Exchange and Nasdaq have traditionally retained dominance of market activity. However, the shift towards off-exchange trading is increasingly becoming a long-term trend and may eventually become permanent.
According to Larry Tabb, head of market structure at Bloomberg Intelligence, the potential implications of a continued shift away from exchanges include worse pricing and execution for stocks. The Securities and Exchange Commission has taken steps to try to push more activity back on-exchange, but for now the threat to market efficiency remains a distant concern.
The surge in off-exchange activity corresponds with increased volumes in stocks worth less than $1, which are typically traded by retail investors. This is seen as a beneficial trend, as it allows these investors to keep their trades hidden from the rest of the market.
Meanwhile, the number of off-exchange venues that offer an alternative way to process trades has been growing. These venues, known as alternative-trading systems, help institutional investors limit information leaking to the market and adversely affecting prices.
The potential risks of off-exchange trading include less efficient pricing and execution, as well as increased costs for investors and issuers. However, Nasdaq’s Chuck Mack notes that the shift is happening gradually and may not become apparent until it’s too late.