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Risk of Dark Pools and Rebirth of ECNs: Death to Exchanges?

Exchanges currently make up approximately 75% of the U.S. market share for equities trade volume, versus ATS's 25%. However, by the end of 2011, Aite Group expects to see exchange market share drop to approximately 62%.

A new Impact Report from Aite Group, LLC examines key trends in the U.S. Alternative Trading System (ATS) market and provides a clear categorization of some of the platforms vying for market share. The report, titled Risk of Dark Pools and Rebirth of ECNs: Death to Exchanges?, also provides market share and future projections on the U.S. equities market.

Market fragmentation continues to increase as new ATSs enter what appears to be an already overcrowded U.S. equities market. There are at least 35 potential execution venues for U.S. equities. Though most of the larger venues are indeed connected, a growing segment of the execution market (i.e. dark pools) has been largely disconnected from the rest of the marketplace to date. However, things are rarely static in the U.S. securities industry, and the ATS market is no exception.

Aite Group expects an increasing decline in exchange market share for the foreseeable future, as the NYSE Group, NASDAQ, and various regional exchanges struggle against the more nimble and price-competitive ECNs and dark pools. However, by the end of 2011, the exchange market share should stabilize at approximately 62%.

Despite the growth of ECNs, dark pools, and other ATSs, over the long-term, success will follow liquidity. Many smaller players will simply go out of business. The few successful remaining ATSs will likely find themselves operating under the banners of the NYSE Group or NASDAQ.

"A trader looking to get an order done in the U.S. equities market confronts a highly fragmented market," says Sang Lee, managing partner at Aite Group and author of the report. "Navigating through the market clutter will not be easy in the short-term as liquidity migrates from one location to another. However, market consolidation appears inevitable, driven by expected pricing compression and the natural migration of liquidity into three to four largest players."