On Monday, April 3, 2017, FINRA published the latest ATS block-trading statistics for February 2017. Month over month, our block volume increased, and for the fifth month in a row, we had one of the highest ranks for Average Trade Size for the categories 10,000 shares and above, and 10,000 shares and $200,000 combined. Separately, we noticed that Tier 2 volume has been on the rise and represented a significant portion of our volume in February. Tier 2 names represent a large universe of stocks (including the Tick Pilot) and tend to be harder to trade, which shows our overall effectiveness in trading these names.
We highlight the Luminex block trading statistics for February 2017 and the volume trend in Tier 2 securities for Luminex and the broader market.
February Block Data & Luminex Average Trade Size
Luminex had the highest ATS Average Trade Size in the categories of 10,000 shares and above, and 10,000 shares and $200,000 combined, at 52,331 shares and 53,703 shares respectively (excluding Dealerweb).
Tier 2 Volume
The total volume for Tier 2 stocks has been on the rise, however more recently, the majority of the volume, including the increase, is coming from off-exchange volume executed in non-ATS venues. ATS volume in Tier 2 stocks has increased slightly, but now, accounts for approximately 40% of ATS total volume, an effect augmented by declining ATS volume in Tier 1 stocks.
Luminex Tier 2 Volume
At Luminex, the distribution of orders we receive is typically even between large, mid, and small cap stocks, but recently, we have experienced a higher percentage of Tier 2 volume relative to our total volume, which, unlike the general ATS space, has grown steadily over the past year. According to the FINRA data for the week of February 27, 2017, our weekly volume was one of the highest to date, and at the same time, Tier 2 stocks accounted for approximately 40% of our total weekly volume.
Block Volume as a Percentage of ATS Volume
ATS volume accounts for approximately 35% of total off-exchange volume – roughly 14-15% of consolidated volume – of which, 10% represents volume traded in blocks. ATS block data is available dating back to August 2016, and since then, block volume (trades >10,000 shares and above) has risen by 11%. Block volume as a percentage of ATS total volume has also increased from 8.5% to 10.4%. It is important to note that while block volume, measured in shares traded and as a percentage of ATS total volume, is higher, ATS volume over the same period has declined. In other words, block volume is a larger piece of a smaller pie, which means context and venue selection are key when it comes to measuring volume.
Interestingly, block volume on NYSE and NASDAQ seem to be following a similar trend. Both NYSE and NASDAQ publish statistics regarding U.S. block volumes on a monthly basis. According to their websites, U.S. block volume has remained relatively flat or just increased slightly, but block volume as a percentage of total volume has increased, which means their total volume declined.
The majority of block volume for NASDAQ and NYSE tends to come from the open and closing auctions, two areas where trading is, for the most part, “un-fragmented.” Primary exchanges – U.S. and European – have begun competing with dark pools by capitalizing on their ability to conduct auctions in order to redirect volume back on-exchange. Whether U.S. exchanges will find success in the intra-day auction is unknown, but as it stands, exchanges are working hard to compete in the block trading space by appealing to institutional investors.
Source: nasdaqtrader.com, nyxdata.com
Higher Demand for Small Caps
Last month, Barron’s published an article that discussed the increased focus on small cap companies and noted the proportion of U.S. equity allocations dedicated to small caps has risen from 20 to 25%. While many reasons may drive firms’ investment decisions to invest in small caps, one theme cited as a primary cause is the high price of large cap companies. According to Barron’s, high-priced large cap stocks have generated a great deal of concern because, historically, valuations have reached today’s levels roughly 10% of the time. Therefore, given that large cap stock prices are relatively expensive – and aren’t splitting – a reasonable place to find value is in small and mid-cap companies, which would increase overall trading activity in those segments.
What about the Tick Pilot?
Sourcing liquidity in small cap stocks in an electronic and highly fragmented marketplace can be especially demanding and is a challenge that has garnered a great deal of attention since the launch of Tick Pilot. Preliminary results published on the early effects of the Tick Pilot, have shown that dark trading has increased across Groups 1 and 2, which could be one factor contributing to the rise in Tier 2 off-exchange trading. Tick Pilot names technically qualify as “Tier 2”, but given such a large number of stocks make up the Tier 2 universe, to know whether Pilot stocks are a direct influence on Tier 2 volume is difficult. Still, if the Tick Pilot were determined a primary cause behind the increase in Tier 2 volumes, it would most likely be from stocks in Groups 1 and 2. Groups 1 and 2 have experienced higher levels of dark trading because, unlike Group 3, they are not subject to certain provisions, like Trade-At, which many say have deterred dark trading.
In our March 2017 piece titled, Luminex, the Tick Pilot, and Execution Quality, we highlighted the unique benefits of trading Tick Pilot stocks at Luminex, particularly names in Group 3. We argued that executing any one of the approximately 1200 names in the three Test Groups at Luminex can improve overall execution quality, because, apart from the $0.05 requirement for submitting orders, our executions are not subject to certain provisions of the Pilot that have made trading stocks challenging, especially Trade-At.
To date, aggregated statistics regarding volumes by Pilot Group are not available via FINRA’s OTC transparency website. As the Pilot continues, additional information regarding volume in Pilot stocks across trading venues will become available and should help with the process of venue selection. As we’ve come to learn, where certain stocks trade is meaningful because it helps us understand behavior and why they might be trading there in the first place.
As always, if you have any questions, please let us know.
FINRA OTC Volume Overview
- FINRA began publishing data on the activity level of registered Alternative Trading Systems (ATS) in June 2014.
- On April 25, 2016, FINRA began publishing the remaining OTC equity volume executed away from ATSs.
- On October 3, 2016, FINRA began publishing monthly information on block-sized trades occurring on ATS venues.
- Data Source: https://otctransparency.finra.org/