Credit Suisse Shutters Light Pool Alternative Trading System; Barclays May Be Next With Closure of Directex
Credit Suisse (NYSE:CS) closed its alternative trading system (ATS), Light Pool, recently – making it the latest addition to the list of private stock trading systems that have called it quits after regulators imposed stricter rules on the industry. [1] Light Pool was a part of Credit Suisse’s Advanced Execution Services (AES) offering for institutional traders and hedge funds, and allowed clients to see all available trades in the system – as opposed to its “dark pool” counterpart Crossfinder which displays no trading information. Notably, Crossfinder (which is the 2nd largest ATS in the country in terms of trading volumes) will not meet the same fate as Light Pool (which had an industry rank of 25 in Q3) any time soon, as it remains a profitable venture for the Swiss banking giant.
There were a total of 48 registered alternative trading systems in the U.S. at the end of 2014, but with Light Pool also shutting down, the figure now stands at 38. [2] Some other ATS that closed over recent months were those run by Citigroup (Liquifi), Bank of America’s Merrill Lynch arm (ATS-1), and Jefferies (Jet-X) – all of which reported trading volumes in early 2015 that was below that for Light Pool. [3] Based on the recent trends in the industry, we believe that Barclays is likely to close its Directex ATS offering in the near future. Directex is similar to Light Pool and has been seeing depressed trading volumes over recent quarters – something that should be hurting profits at the British bank’s investment banking arm given the high regulatory costs involved. [4]
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Alternative trading systems provides investors an avenue to trade shares outside an exchange. They are generally preferred by investors who want to trade large blocks of shares without tipping off the larger equity market to the size of the order – something that will result in unfavorable settlement prices for them. ATSs include dark pools, where prices and volumes are only published after the entire transaction is completed, and electronic communication networks (ECNs) that function like exchanges on a smaller scale (with price and volume of market orders visible to all users).
ATSs have been under the scrutiny of regulators since mid-2014 after several dark pools were found resorting to practices that helped high-frequency traders at the expense of other unsuspecting clients. The discovery resulted in regulators drafting new rules to improve transparency in the industry, while also imposing stringent fines on firms found guilty of unfair practices in ATS run by them. The largest fines were attracted by Credit Suisse and Barclays, who paid $84 million and $70 million respectively to the SEC earlier this year. [5] These fines were primarily for irregularities in Credit Suisse’s Crossfinder and Barclays’ LX dark pool trading systems, although $10 million of the figure for Credit Suisse was for issues with its Light Pool ECN. [6]
The mandatory disclosures and higher regulatory oversight on ATS by the SEC and FINRA have reduced the attractiveness of many of them to potential clients over recent years – leading to a steady reduction in activity levels for the smaller ones. As the smaller units were pushed into the red, the firms running them saw it best to shutter them. A total of 2 ATSs were closed in 2015 and another 8 closed in 2016, including Light Pool. [2] Given the fact that Light Pool is a very small part of Credit Suisse’s investment banking operations, the decision to close the unit will have negligible impact on the bank’s revenues. However, the decision will be marginally beneficial to its overall investment banking margin.
It should be noted that the popularity of ATSs in general has not diminished over the years, as the total trading volumes of shares in them grew from 57.9 billion in Q3 2014 to just under 60 billion in Q3 2016. [3] Notably, the four largest ATSs – Credit Suisse (Crossfinder), UBS (UBS ATS), Deutsche Bank (SuperX) and Morgan Stanley (MS POOL ATS-4) – have consolidated their positions in the industry over this period, with their combined market share swelling from 36% in Q3 2014 to 42% in Q3 2016. At the same time, Barclays’ ECN offering (Directex) saw trading volumes fall from 42 million to 0.14 million during this period. We believe that the corresponding loss in revenues will make it untenable for Barclays to continue running Directex for long in the current regulatory environment. As in the case of Credit Suisse, a decision to discontinue Directex will have a marginally positive impact on investment banking margins for Barclays.
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More Trefis Research
- Lights out for Credit Suisse’s ‘Light Pool’ stock trading venue, Reuters, Dec 13 2016 [↩]
- Equity ATS Firms, FINRA Website, Dec 1 2016 [↩] [↩]
- ATS Transparency Statistics, FINRA Website [↩] [↩]
- Barclays Directex ATS FAQ, Oct 2016 [↩]
- Barclays, Credit Suisse Charged With Dark Pool Violations, SEC Press Releases, Jan 31 2016 [↩]
- SEC Litigation Filing, Jan 31 2016 [↩]