Majority of stock trading now happens in dark pools analysts say, with the trend exponentially growing and likely here to stay.
In a not-so-surprising revelation about the U.S. equity market, recent data indicates that a majority of trading activity is now occurring outside of public exchanges — a topic retail investors have raised awareness for years now.
This shift raises serious concerns about market transparency and fairness, particularly for retail investors.
According to Bloomberg, off-exchange trading, which includes transactions conducted in dark pools, is projected to account for an unprecedented 51.8% of traded volume in January.
This alarming trend poses risks to the integrity of the market and the equity of trading practices.
While off exchange trading has exceeded this amount, particularly in individual stocks such as AMC and GameStop, we are now beginning to see legacy media touch topic on it.
Dark Pools: A Threat to Retail Investors
Dark pools are private trading venues where large institutional investors can buy and sell stocks without exposing their orders to the public.
While these venues can provide benefits such as reduced market impact for large trades, they also suppress price discovery, putting retail investors at a disadvantage.
When the majority of trading occurs away from public exchanges, the essential competitive environment that helps establish fair stock prices is undermined.
As Anna Ziotis Kurzrok, head of market structure at Jefferies, notes, the transition toward off-exchange trading may signal a longer-term trend that could fundamentally alter how the market operates.
With fewer orders competing on public exchanges, the potential for worse pricing increases.
This scenario is particularly detrimental for retail investors, who rely on transparent pricing to make informed decisions.
Market Manipulation Concerns: The Role of Citadel and Virtu
Two key players in this landscape are Citadel Securities and Virtu Financial, both of which process a significant portion of trading orders.
Their dominance raises important questions about conflicts of interest.
As market makers, they benefit from executing trades in dark pools, where they can control prices and limit the information available to the broader market.
This practice can lead to situations where retail investors are effectively “cheated” out of fair prices.
By processing trades internally, these firms can maneuver market dynamics to their advantage, often at the expense of retail investors.
This not only affects pricing on individual stocks but can also contribute to a broader erosion of trust in the equity markets.
If retail investors believe they are being consistently disadvantaged, it could deter them from participating in the market altogether.
Not to mention, Ken Griffin’s Citadel has a long history of market manipulation and has fought against market transparency for years.
Recently, watchdogs detected systemic risks from Citadel and others after studying the leverage of non-bank market players.
In October, Citadel Securities was fined by FINRA for illegal data reporting of tens of billions of equity and option order events to the CAT system.
And just a month prior, Citadel was named in a RICO lawsuit in Georgia along with others for defamation and intellectual property theft.
And this is just the tip of the iceberg.
Bookmark: “The Game is Rigged”, Says Ex-Citadel Data Scientist
Legacy Media Coverage: A Positive Step Forward
The growing attention from legacy media outlets, such as Bloomberg, on the implications of dark pools and off-exchange trading is a crucial development.
By bringing these issues to light, they provide retail investors with valuable insights into the complexities of the market.
Increased awareness can empower investors to make more informed decisions and advocate for greater transparency and fairness in trading practices.
Moreover, the Securities and Exchange Commission (SEC) has now recognized the need to address these challenges.
While only two of the four proposals aimed at improving market structure have been implemented, the SEC is taking steps to encourage more trading activity on public exchanges.
However, as seen under Gary Gensler, investors expect real action from this new SEC rather than just lip service.
This regulatory scrutiny is essential for protecting retail investors and ensuring that market dynamics remain fair and competitive.
A Cautionary Tale: The Evolving Landscape of Trading
The ongoing shift toward off-exchange trading serves as a cautionary tale for investors and regulators alike.
As Chuck Mack, Head of Strategic Operations and Public Policy at Nasdaq, warns, the gradual erosion of public trading could lead to inefficiencies and increased costs for both investors and issuers.
The metaphor of “boiling a frog” aptly illustrates how incremental changes can lead to significant negative consequences before anyone realizes it.
With approximately 1.7 billion shares changing hands daily in alternative trading systems (ATS) as of November, the trend toward dark pools is undeniable.
These systems offer anonymity to institutional investors, allowing them to execute trades without impacting market prices.
However, this advantage comes at a cost to retail investors, who may find themselves at a disadvantage in terms of price and information.
A Call for Transparency and Fairness
The rise of dark pools and off-exchange trading poses serious risks to retail investors by suppressing stock prices and undermining market integrity.
The dominance of firms like Citadel and Virtu, coupled with the lack of transparency in trading practices, raises ethical concerns that must be addressed.
As legacy media increasingly shine a light on these issues, it is crucial for regulators and market participants to work together to foster a fairer and more transparent trading environment.
Only through concerted efforts can we ensure that all investors, regardless of their size, have a fair chance to participate in the equity markets.
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