Each week, in addition to the OTC statistics by venue, FINRA publishes the total amount of executed volume that occurred across all ATS venues for every NMS symbol.
After taking a closer look at the data on a symbol-by-symbol basis, we found that a relatively few number of symbols accounted for what was – surprisingly – a significant amount of ATS executed volume. On a weekly basis, we noticed that for Tier 1 stocks, 50 symbols accounted for nearly 35% of the ATS weekly volume and close to 30% for Tier 2 securities. (See chart below)
Why was this surprising?
Tier 1 and Tier 2 are comprised of 1,600 and 6,000 symbols respectively. Therefore, the top 50 symbols traded by volume, would mean that over a third of ATS volume comes from just 3% of the entire Tier 1 symbol universe. And for Tier 2? Roughly, a third of volume executed across all ATSs comes from just .008% of the Tier 2 symbol universe.
One of the most common challenges faced by traders is the need to trade just to keep up with tape volume to reduce the risk of missed liquidity – the volume versus liquidity conundrum. Frequently, traders and smart-order-routers will direct orders to venues with the greatest amount of volume or market share because it increases the odds of execution. Sometimes, this methodology proves useful. On the other hand, higher volume and market share may indicate a higher probability of trading, but they do not take into account the likelihood of execution at the issue level. If 50 symbols consistently account for nearly a third of the ATS volume on a weekly basis, what does that say about the likelihood of execution when we need to trade one of the remaining 7,500-plus NMS securities? In other words, are market share and volume statistics the most accurate indicators for increasing the likelihood of execution or are they instigating volume?
On Monday, October 3, 2016, FINRA will publish monthly information on block-sized trades occurring on ATSs, information that will no doubt aid institutions with the process of venue selection. However, finding a natural counterparty among today’s myriad of trading venues will continue to require patience, time, and insight into the primary forces behind volume. We realize that market conditions fluctuate and that trading a block is challenging, and at times, may not always be the optimal trading solution; but when it is, venue selection becomes even more critical.