Off-Exchange Trading Increases Across All Types of | U.S. Markets

We not too long ago talked about how off-exchange trading hit new document ranges in 2024, topping 50%.

In reality, in November 2024, the U.S. equities market noticed the primary month ever the place more quantity executed off-exchange than on. Off-exchange quantity share additionally stayed above 50% in December 2024 and January 2025.

Some assume the increase in off-exchange quantity is as a result of of the rise in “sub-dollar” stock trading, which are typically microcap shares traded principally by retail traders, suggesting that this isn’t a drawback mutual funds need to fret about.

Nevertheless, at the moment’s knowledge exhibits that’s not true. 

Off-exchange trading is high throughout the board

In reality, the rise of off-exchange trading is widespread, affecting heaps of shares that mutual funds are additionally making an attempt to buy in massive portions. Off-exchange trading is over 45% for all market caps, together with for shares of all costs and exchange-traded funds. 

Regardless of how you slice it, off-exchange share is up considerably since 2019.

Chart 1: Off-exchange share has risen throughout all teams of stock since 2019

The rise is essentially pushed by bilateral trading – not darkish swimming pools

Curiously, if we glance individually at darkish swimming pools (ATSs) and different off-exchange (principally bilateral) trading, we see that the darkish swimming pools market share has remained rangebound since no less than 2019.

Which means the growth is coming from companies filling unfold crossing orders (typically with price enchancment) and negotiated trades. 

To be honest, a lot of this trading is retail, which has grown considerably since Covid and free commissions. However retail doesn’t account for all of the non-ATS trades printed off-exchange. 

Chart 2: Bilateral (non-ATS) has seen nearly all of the off-exchange share increase since (no less than) mid-2019

Asset managers have much less circulate to work together with

Importantly, for mutual fund managers, these bilateral trades characterize liquidity that they sometimes can’t work together with. 

You would possibly assume it’s simply a few “retail darlings” pulling the averages up. However in actual fact, all shares within the Russell 3000 Index, we see that only a few now have off-exchange share under 30% (or, stated one other manner, on exchange above 70%). 

The bulk of shares see off-exchange trading between 40%-50%, and that’s true regardless of the stock price (horizontal axis) or market cap (circle dimension).

Chart 3: Accessible circulate for asset managers 

On the very least, that may imply buy-side orders utilizing a “VWAP” or participation algorithm will truly be trading more aggressively within the market than they appear, which may increase the prices of trading. 

It could additionally add to look and signaling prices, as routers navigate the fragmented hidden liquidity, and alternative prices as fills are missed.

It could be time to scale back laws that create pointless fragmentation 

Lit costs, honest entry and aggressive NBBO are options that make stock markets completely different to different markets. U.S. households depend upon a vibrant public equity market for his or her financial security. 

It’s potential regulators have taken as a right the costs that lit markets present. Due to economics that favor darkish over lit markets, lit market share has been falling globally.  

For institutional merchants making an attempt to navigate fragmented markets with massive trades, fragmentation makes discovering liquidity more durable. Segmented markets imply there’s much less liquidity than a trader would possibly assume. Each can increase trade prices and cut back energetic mutual fund returns.

Analysis additionally means that corporations with wider spreads can even have increased prices of capital, which is able to cut back their investment back into the U.S. and world financial system. 

Educational research point out that there’s a tipping level above which market high quality and spreads worsen, doubtlessly between 10% to 46.7% darkish. The U.S. market has now breached all these ranges.