Most of Wall Street’s stock trading is now hidden and entered the dark ages
(Bloomberg) — Here’s a surprising new fact about the world’s largest and most liquid public equity market: Much of its activity is now private.
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For the first time, the majority of trading in U.S. stocks is taking place regularly outside of the country’s foreign currency, according to data compiled by Bloomberg.
This insider-to-outside activity – taking place within major firms or alternative platforms – accounted for a record 51.8% of transaction volume in January. Barring an unexpected surge, it would be the fifth monthly record in a row and the third month in which hidden transactions accounted for more than half of the total volume.
In other words, the shift “appears to be developing into a long-term trend and possibly sustainability,” Anna Ziotis Kurzrock, head of market structure at Jefferies, wrote in a note to clients this month.
Foreign trading has been a growing feature on Wall Street for years, but until now, public venues including the New York Stock Exchange and Nasdaq have dominated overall market activity. That’s important because exchanges show the quotes that most participants use to sell stocks.
According to Larry Tabb, head of market structure at Bloomberg Intelligence, the shift away from outsourcing is the culmination of a years-long trend.
“Theoretically, the more trading that goes off the exchange, the fewer orders the exchange has to compete to determine the best price,” he said. “This means that prices and foreign exchange may worsen.”
The Securities and Exchange Commission has taken steps in recent years to reform market structures to try to stem more activity. Of the four proposals submitted by the SEC, only two rules — those that would regulate the way stocks are valued and trades made and exchanged — were ultimately passed.
At present, the threat to market volatility is still a concern, with 48.2% of trading in January still in volatility. Instead, the change is probably more indicative of the market environment.
According to Kurzrok at Jefferies, the increase in foreign exchange activity corresponds to an increase in stocks valued at less than $1, which are typically traded by retail investors. That makes sense, since that business is usually handled by market-making giants like Citadel Securities and Virtu Financial.