(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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For the first time on record, the majority of all trading in U.S. stocks now takes place permanently outside the country’s stock exchanges, according to data compiled by Bloomberg.
This over-the-counter activity — which occurs internally at large firms or on alternative platforms known as dark pools — is on track to account for a record 51.8% of trading volume in January. Barring the unexpected drop, it will be the fifth monthly record in a row, and the third month in a row that hidden trades account for more than half of total volume.
In other words, the shift “appears to be developing into a longer-term trend and very likely a sustained one,” Anna Ziotis Kurzrok, head of market structure at Jefferies, wrote in a note to clients this month.
Over-the-counter trading has been more common on Wall Street for years, but until now the public venues, including the New York Stock Exchange and Nasdaq, have maintained an overall dominance of market activity. This is important because stock exchanges display quotes that most participants use to determine the price of stocks.
The move toward over-the-counter trading is the culmination of a multi-year trend that, if continued, could eventually have implications for how markets function, according to Larry Tabb, head of market structure at Bloomberg Intelligence.
“Theoretically, the more trading that takes place off-exchange, the fewer orders on the exchange are competing to determine the best price,” he said. “This means prices on and off the stock exchange could deteriorate.”
The Securities and Exchange Commission has taken steps in recent years to try to encourage more activity on the stock market by revamping the structure of the market. Of the SEC’s four proposals, only two rules—which change the way stock prices are determined and transactions are executed on and off the stock exchange—were finally adopted.
For now, the threat to market efficiency remains a distant concern, with 48.2% of trading in January still taking place on the stock exchange. Instead, change is perhaps more useful as an indicator of market development.
Kurzrok of Jefferies notes that the rise in OTC activity corresponds to increased volumes of stocks worth less than $1, which are typically traded by retail investors. This makes sense because that business is often handled in-house by market-making giants like Citadel Securities and Virtu Financial.
