As someone building in private markets, I often look at public markets as a north star for transparency and efficiency. But what happens if the north star is dimming?
This recent @Bloomberg piece caught my attention. @Katherine Doherty reported that, for the first time on record, more public equity volume is trading off-exchange than on-exchange.
Is this problematic?
Both on-exchange and off-exchange transactions must be reported to the SEC as soon as they happen—but not the buy/sell orders. The fewer orders on the publicly available ledger, the less efficient the market becomes for investors. Here’s why:
📉 Less market-visible bids and asks lead to less public price discovery. It’s harder to know what the market clearing price of an equity is at any given time.
↔️ Less efficient price discovery leads to widening bid/ask spreads. The gap between willing buyers and sellers widens, reflecting reduced liquidity.
💧 Wider bid/ask spreads make it riskier for market makers like @ Citadel and @Jane Street to provide liquidity continuously, causing them to charge higher transaction fees for all buyers/sellers.
The shift from public exchanges like @Nasdaq and @NYSE to private alternative trading systems (ATSs) and dark pools is a systemic change. Here’s what’s driving it:
- Institutional investors use ATSs to avoid signaling their positions and getting front-run by high-frequency traders. For more on this, check out a Caplight favorite, @Flash Boys by @Michael Lewis.
- Retail investor trading of penny stock has increased. These trades don’t meet major exchange requirements so happen off-exchange.
- Lower trading costs—when moving institutional-sized blocks, every basis point matters.
Should the average retail investor be worried about selling @Apple stock? Probably not. There’s still strong price discovery & liquidity for highly active names.
But if this trend continues, what happens when 80% or 90% of public equity volume is happening off-exchange? At some point, we might feel it.
Could this be where public and private markets collide?
At @ Caplight, we’ve aggregated 100s of $B of secondary market transaction and bid/ask indication data. We aggregate data from ATSs, broker-dealers, and investors. We make our aggregated ‘tape’ available to all subscribers.
And… the pre-IPO market seems to love it. We often hear that we’re making it easier for capital to flow into the space.
If the off-exchange trend continues, is there a point where price discovery for the least liquid public stock matches that of the most liquid private stock?
Maybe one day the distinction won’t even matter.
