Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

High-speed trading surge starts to slow down

Breaking HFT's 'cone of silence'

Though it may feel like high-frequency trading is taking over the world, volume actually has been pretty flat in 2014, according to the latest industry data.

Trading activity averaged 903 million shares a day in March, about the same as February and slightly below January's 912 million, according to data from Tabb Group, which compiles a monthly list of information from 42 of the largest off-exchange trading platforms.

On a yearly basis, alternative trading system, or ATS, volume increased about 12 percent, but the total that came from dark pools—which don't report their activity either to the Nasdaq or New York Stock Exchange—was about flat as well. The flattish trading activity seems to match a trend in which fewer firms are entering the crowded offline/dark pool/high-frequency trading space.

"The number of registered ATSs has kind of plateaued," Sayena Mostowfi, Tabb's senior equities analyst, said in an interview. "We predict in the upcoming year we're actually going to see a decrease."

Artiom Muhaciov | E+ | Getty Images

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That's not to say that there isn't growth among individual firms, and one has been doing especially well.

IEX, a trading platform profiled in Michael Lewis' new book "Flash Boys," has implemented a system that it touts as leveling the playing field for traders who find their orders getting front run by high-frequency trading outlets.

The ensuing publicity from the best-seller may have helped bring about a surge in volume for IEX, which saw activity increase 27 percent last month to 19 million shares a day, ahead of the March 31 official book release date.

"We are rooting for them," said Joe Saluzzi, co-founder of Themis Trading, which is a trading partner of IEX. "I would like to see them get a lot more volume to encourage more disclosure in the market. Other people might see that and say, 'They're doing it the clean way, maybe we should, too.'"

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For several years, Tabb has been tracking data for platforms that trade away from the traditional exchanges in an effort to bring more transparency to an industry that has trended more and more into the shadows.

It has met various levels of success, with its monthly Equities Liquidity Matrix arguably the most detailed picture. The report lists among other things market share leaders, average daily volume and average block order size.

To be sure, there are shortcomings: The data are self-reported from the companies involved, and there are dozens of companies that do not participate.

But the reports help at least provide detail on the major players and how much of stock trading is taking place offline. Regulators do not yet make offline platforms provide data though in May they will have to begin reporting volume, which in itself is at least a start.

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"More trading venues are open to sharing nonrequired metrics," Tabb's Mostowfi said. "As long as they feel it's within a trusted boundary and (it's with) a third-party vendor that does not have a conflict of interest, they're more than willing to share that information."

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Saluzzi, though, said much more information is needed if the industry is going to become truly transparent and remove the secrecy stigma it carries that threatens market integrity.

"I want to know more about what's going on inside the dark pools. How are they rerouting orders?" he said. "I would like to see more disclosure. I would doubt they would do it on their own accord."

Some of the other data points from the March report: Barclays LX continues to be the leading platform, at 110 million shares per day, with LavaFlow ECN second at 90 million and Citadel Connect third with 86 million.

LavaFlow ECN is the leading small-cap platform with 26.8 million shares a day—amounting to 30 percent of its total business—while Barclays LX is first in the mid-cap space with 32.3 million shares a day. The Barclays platform also leads in large cap, with 51.8 million shares traded.

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As a percentage of total traders, Knight Link by KCG, ConvergEx Group Vortex and LavaFlow ECN each have 30 percent of trading dedicated to small caps. Liquidnet Negotiated has 59 percent of its trade in mid caps, while Deutsche Bank Super X, Goldman Sachs Sigma X and Knight Match by KCB each have 53 percent of their business coming from large-cap trading.

In the largest trade size, Liquidnet Negotiated is easily the leader at 40,684 shares, dwarfing all of the other firms. Small trading blocks—used to avoid tipping off competitors about an investor taking a large position in a stock—are characteristic of many HFT firms and cited by critics as a method of market manipulation.

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