Wednesday, July 18, 2007

Dark Pools - Is Consolidation Coming?

The number of dark pools have doubled to over 40 since the start of last year. The success of these alternative trading venues shows excellent prospects for this industry; but the sheer number of firms is a sign that some consolidation will occur. Obviously all 40 firms will not be successful as independent entities in the long term.

The most likely survivors are those backed by large brokerage consortiums. LeveL and Bids have reached an average combined daily trading volume of 50 million shares. LeveL was created by Citi, Credit Suisse, Fidelity Brokerage, Lehman Brothers and Merrill Lynch late last year. Bids was launched in spring and backed by twelve brokerage firms, including Citi, Credit Suisse, Lehman and Merrill Lynch. Notice that some firms have backed more then one single Dark Pool electronic trading venue.

There is an expectation of increased regulatory scrutiny of Dark Pools because they operate outside the scope of the public market, and may undermine individual investors causing them not get the best prices for their trades. This may add increased oversight and costs that will help drive consolidation in the Dark Pool industry.

Similar to how the multitude of ECNs consolidated over time, the expectation is that a similar set of mergers will occur with the Dark Pool firms.

Trading volumes rise in dark pools