(Bloomberg)—Here’s a surprising new fact about the world’s largest and most liquid public stock market: Most of the activity on it is no longer public.
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Recorded for the first time, most trading in U.S. stocks is now consistently off the country’s exchanges, according to data compiled by Bloomberg.
This off-exchange activity—which happens internally at major companies or on alternative platforms known as Dark Pools—is on track to account for a record 51.8% of January’s trading volume. Barring an unexpected dip, it will be the fifth monthly record in a row and the third month that hidden transactions make up more than half of all volume.
In other words, the shift “appears to be developing into a longer-term trend and perhaps a permanent one,” Anna Ziotis Kurzrok, head of market structure at Jefferies, wrote in a note to clients this month.
Exchange 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 maintained overall dominance of market activity. That’s important because exchanges reflect the quotes that most participants use to price stocks.
The shift to off-exchange trading is the culmination of a yearslong trend, which if it continues could ultimately have implications for how the market functions, according to Larry Tabb, head of market structure at Bloomberg Intelligence.
“Theoretically, the more trade that isn’t exchanged, the fewer orders there are to compete to determine the best price,” he said. “This means prices on and off-exchange could get worse.”
The Securities and Exchange Commission has taken steps in recent years to try to push back more activity by revamping the market structure. Of the SEC’s four proposals, only two rules—which would regulate how stocks are priced and trades are executed on and off exchanges—were ultimately adopted.
For now, the threat to market efficiency remains a distant concern, with 48.2% of January transactions still taking place at exchange. Instead, the change may be more useful as an indicator of the evolving market landscape.
Kurzrok at Jefferies notes that the increase in off-exchange activity corresponds with increased volumes in stocks worth less than $1, which are typically traded by investors. That makes sense, because that business is often handled internally by marketing giants like Citadel Securities and Virtu Financial.
