A regulatory debate over dark execution is inevitable, says TABB Group in new research announced today, turning a spotlight on dark execution on- and off-exchange.
Trading outside the lit order books offers legitimate value and advantages, says Miranda Mizen, a TABB principal, director of equities research and author of “A Spotlight in the Dark: An Inevitable Debate,” but the industry lacks consensus about its cause and effect.
This is not a dark-versus-lit question, Mizen explains. “This is a question of how different and similar activity and execution alternatives should be regulated and fit together.”
More than 30% of equity trading happens off-exchange and is reported to one of the Trade Reporting Facilities (TRFs). In addition, 40%, or 3,191 publicly-traded securities on tapes A, B and C, had TRF trading volume in excess of 40% in September 2012. “This trading was seen not only in small, less liquid securities as some of the most liquid, highly capitalized securities have almost half of their trading volume reported through the TRF.”
The concern is that the inability to determine exactly what is happening in the marketplace results from today’s increasingly more complex trading ecosystem, including greater degrees of dark trading and growing fragmentation. With their oversized orders in hand, buy-side traders want sizable fills, natural counterparties and the ability to avoid being seen but quality, fairness and efficiency of the public markets are brought into question if they are a destination of last resort.
TABB anticipates regulatory focus on price discovery, price improvement, trade size and transparency as an integral part of the broader market structure debate. “Given current trends,” Mizen says, “we believe regulatory action lies ahead but for it to be effective, any scrutiny of dark execution off-exchange must equally examine dark execution on-exchange, grounded in data and measured against benchmarks of fairness and efficiency.”
The Executive Summary for this 19-page report with 16 exhibits is available now for download by TABB Group Research Alliance Equity clients and qualified media at www.tabbgroup.com. For more information or to order the report, write to info@tabbgroup.com.