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FLASHBACK FRIDAY: The Magic Number

Flashback Friday sponsored by Instinet

Traders Magazine Online News, December 15, 2017

John D'Antona Jr.

One is reportedly the loneliest number.

It takes two to tango.

Three times a lady.

It takes the human eye 350 milliseconds to blink.

Four years ago, 50 percent or thereabouts was deemed to be the threshold of when offboard or non public trading would cause the equities market structure concern. Traders and pundits felt that at this “magic number” many bad things would happen. The argument went that as more flow moved away from the public exchanges and either into dark pools or stayed on a trading desk to be internalized it would lead to a deterioration of market quality. It was argued that increased offboard trading could lead to less public price discovery – one goal of the exchanges at the time – and hinder best execution. One the other hand, more off board trading would could prevent information leakage and promote block trading.

David Weisberger, CoinRoutes

So, fast forward and the debate seems to have faded as the market is more concerned with boosting trading in small caps, too much regulation and crypto currencies. Or is it?

David Weisberger, principal at CoinRoutes and long-time observer of the equities market, told Traders Magazine that concerns over offboard trading and a “magic number” depend on who one asks in the market.

“In Europe, the regulators clearly care, as they are about to ban a lot of the off board trading,” Weisberger began. “In the US, there has been an increase in single-dealer dark pools as firms building Systematic Internalizers in Europe realized that they can leverage the same technology to offer liquidity from their Central Risk Books or market making platforms.”

Exchanges still care as they did before, but have bigger issues and want to be thought of as technology companies, he continued. As an example, Weisberger said Nasdaq opted to facilitate dark venue creation rather than fight it. “That’s why they built the platform to support Goldman's dark pool.”

Spencer Mindlin, capital markets analyst at Aite Group said that despite 20 to 30 percent of volume taking place off-exchange, one doesn’t hear investors complaining much about execution prices and price discovery. 

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