U.S. Equities Trading Venues: A Closer Look

The U.S. off-exchange equities volume growth in recent years has fostered new competitive dynamics across the market. Cboe’s North American Execution Consulting team previously explored this and highlighted the functionality and features of different execution venue types and the increase in trading reported to the Trade Reporting Facilities (TRF). In our latest analysis, we’re providing a refresher on these topics and more, along with taking a closer look at overall market trends both on and off-exchange.

Types of Execution Venues

First, there are five main types of U.S. equities trading execution venues:

• Exchanges with a Maker-Taker Model
• Exchanges with an Inverted Model
• Alternative Trading Systems (ATS)
• Single Dealer Platforms (SDP)
• Principal Dealers and Central Risk Platforms

The table below provides a summary of each trading venue type and compares features, pricing and regulatory requirements specific to each of their operations.

Off-exchange venues have become an alternative to executing trades on-exchange by offering features such as counterparty selection, greater anonymity and reduced market impact. As of July 2023, Trade Reporting Facilities (TRF) market share holds 44.97% of overall market volume, along with a 48.06% market share of overall market volume, excluding auctions. To look further into off-exchange transactions, our team utilized the TRF data source published by FINRA. The data can be categorized into two market participant types: ATS and Non-ATS Over the Counter (OTC). Currently, the data does not provide any further clarity to the types of venues grouped into the non-ATS category, as off-exchange venues do not have regulatory filing requirements specific to their operations. Stronger regulatory requirements around transparency for off-exchange venues could create a fairer competitive landscape, enhance understanding of how these venues execute trades and provide investors with opportunities for improved execution performance.  

Source: SIP, FINRA

Note: For July 2023, calculated ATS and non-ATS market share reflected is only inclusive of the week of July 3, 2023. This is a result of a delay in the data published by FINRA. However, TRF market share as a percentage of total consolidated volume is captured for the entire month.

Addressable Market Share

The rise in off-exchange volumes can be attributed to the minimal disclosure required for alternative market centers, in contrast to the substantial regulatory scrutiny faced by exchanges. For example, exchanges are obligated to submit rule filings to the Securities and Exchange Commission SEC for the implementation of, or changes to, exchange fees or exchange products. This rule filing process can take up to 240 days, at the end of which approval may not even be granted. Conversely, off exchange market centers are not subject to the same rigorous SEC filing and approval process, and may make changes on a much more expedited basis.  

The regulatory disparity between exchanges and off-exchange venues is further exacerbated by industry discussions seeking to reduce exchange fees and impair exchanges’ ability to offer enhanced rebates to liquidity providers, which are key tools used by exchanges to incentivize on-exchange liquidity. Such regulation would only result in further reduction in exchanges’ addressable market share —which excludes TRF and open/closing auction volumes —, which has been in decline since 2019, as depicted in the chart below.

Source: SIP

The chart below shows the Addressable Execution Venue market share, calculated by removing open/close volumes and TRF activity. As of July 2023, Cboe has a 26.76% market share—as a percent of total consolidated volume after excluding open/close and TRF volumes—which is comparable to NYSE and Nasdaq.

Source: SIP

Closing Auction and TRF Percentage  of Total Volume

The closing auction is a significant daily event and the closing price to numerous securities products is of increasing importance. As of third-quarter 2023, close volumes are 5.57% market share as a percentage of total consolidated volume, a decrease from 6.65% in second-quarter 2023. The large decrease in closing auctions as a percentage of total volume can be attributed to the second-quarter 2023 Russell Reconstitution and MSCI Rebalance in June.

Source: SIP

Top Tech Stocks

As part of our analysis, we evaluated the dominance of the small group of technology stocks, relative to the overall market. This list includes: AMZN, MSFT, GOOGL, GOOG, AAPL, TSLA, META, and NVDA. The chart below illustrates that more than half the trades executed in this group of symbols are executed off-exchange as of July 2023. Volumes have remained stable, with a 3.76% market share as a percentage of total consolidated volume, but the notional value of these symbols has increased since March 2023, with a recent 18.63% market share as a percentage of total consolidated notional value.  

Source: SIP

More than half of all shares executed in these top technology stocks occur off-exchange, so we took a closer look at ATS market share compared to non-ATS market share. The breakdown depicted below suggests that the majority of top tech stock volume executed off-exchange occurs on non-ATS venues, with an 87.38% market share in July 2023. Since these are higher priced stocks, there is a greater possibility that these orders are institutional transactions, and may be executed via a SDP or other principal means such as high touch execution via the use of balance sheet. As mentioned earlier, the current data does not identify the types of trading venues these symbols execute under, withholding what could potentially be relevant information to investors regarding execution performance and liquidity trends. This is another example of how greater operational disclosure about the types of trading venues under the non-ATS category could help provide knowledge about how different symbols execute off-exchange.

Source: FINRA

Note: For July 2023, calculated ATS and non-ATS market share reflected is only inclusive of the week of July 3, 2023. This is a result of a delay in the data published by FINRA.

Subdollar Securities

Interest in subdollar securities, securities priced less than $1, has increased significantly in the last few years as a result of increased retail market participation since the COVID-19 pandemic. While the popularity of subdollar securities has fluctuated, subdollar securities have driven a significant amount of trading activity so far in 2023. More recently, the increase in subdollar market share can be attributed to symbols like Mullen Automotive (MULN), which had an average daily volume (ADV) of 455 million shares traded and represented 4.38% as a percentage of total consolidated volume in July 2023. A few years prior, Sundial (SNDL) held similar popularity with a peak ADV of 914 million shares traded in February 2021, coupled with an 5.98% market share as a percentage of total consolidated volume. So far in 2023, subdollar volumes peaked in April 2023 at a 15.82% market share, and most recently had a market share of 12.90%.

Source: SIP

Subdollar volume generally consists of retail flow and is also primarily executed off-exchange. Many of these subdollar symbols are not part of an index and have limited institutional holdings. In July 2023, TRF held 59.79% market share in subdollar securities. Echoing the results in another one of our recent studies, Cboe’s market share in subdollar volume is strong and the highest amongst our competitors, with at 14.65% market share in July.   

Source: SIP

Subdollar securities are also primarily traded within non-ATSs off-exchange, supporting that subdollar trading is primarily influenced by wholesaler activity. The chart below illustrates that as of June 2023, non-ATSs held a market share of 93.24% of total subdollar volume, while ATSs held a market share of 6.76%. The dominance of non-ATSs in subdollar securities trading is reflective of retail flow being primarily executed on off-exchange venues.

Source: SIP, FINRA

Nearly 20% of overall volume is concentrated in subdollar securities and the top tech stocks listed above. This growth has led to the decline in all other symbols and price groups. Furthermore, after excluding the top tech stocks and subdollar securities, ADV has decreased to 8.71 billion shares in July 2023, compared to 9.52 billion shares in June 2023.

Source: SIP

With a variety of execution venues both on-exchange and off-exchange, investors can source liquidity within an ecosystem offering different features and functionalities. Exchanges, including Cboe, are obligated to comply with stricter regulatory requirements than non-exchange venues. Requiring off-exchange venues to provide further transparency into their operations and meet requirements comparable to exchanges, could level the playing field for on-exchange venues, create healthier competition and provide more information to investors.

Please reach out to Cboe’s North American equities coverage team with questions and to learn about how we can optimize your trading experience.