Market Liquidity Plummets As Passive Etfs Fuel Shift Away From Traditional Trading

Market Liquidity Plummets As Passive Etfs Fuel Shift Away From Traditional Trading

Market Turmoil: Continuous Lit Volumes Plunge as Dark Pools and Closing Auctions Gain Traction

The market share of continuous lit volumes has hit an all-time low, with the latest liquidity landscape report from Liquidnet revealing a stark decline in lit primary venues. The once-dominant market share now stands at around 29%, marking a significant shift away from traditional trading mechanisms.

The trend is largely attributed to the surging popularity of passive ETFs and the growing importance of the closing auction, which has seen its share of total lit volumes increase to over 38%. Popular algorithms are increasingly allocating a larger portion of their volume curves to the close, thereby reducing slippage against the VWAP benchmark.

The declining trend is also evident in trading volumes on traditional lit primary venues, with Q3 seeing lit volumes accounting for just 45.5% of overall trading activity, down from 57% in 2020. This decline contrasts with the previous year, where direct comparisons saw lit volumes amounting to 47.5%.

Liquidnet’s report highlights the growing influence of dark pools and closing auctions, which have become increasingly important in facilitating market liquidity. The average share of total liquidity at the close has grown to 25% in Q3, up from 22.5% last year, attributed to the increased popularity of dark trading.

The surge in dark pool activity has been particularly notable, with volumes reaching almost 11% of total trading activity in Q3, representing a notable increase from previous years, where dark pools accounted for around 8-10% of market share. The renewed interest in block liquidity has contributed to this growth, with above-LIS fills witnessing annual expansion.

The rise of dark pools and closing auctions is driven by the need for more efficient and cost-effective trading mechanisms. Deutsche Börse’s recent launch of a new dark trading offering and SIX’s BME introduction of a new dark pool are examples of the growing trend towards alternative market structures, aiming to provide market participants with additional sources of liquidity.

As market dynamics continue to shift, it remains to be seen how this trend will unfold. The increasing importance of closing auctions and dark pools marks a significant turning point in the evolution of trading mechanisms, underscoring the need for market participants to adapt to these changes.

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