We recently talked about how non-exchange transactions in 2024 reach a new record level, up to 50%.
In fact, in November 2024, the U.S. stock market saw the first month in history that it exceeded the number of exchanges. In December 2024 and January 2025, the exchange share also remained above 50%.
Some people believe that the increase in non-trading volume is due to the increase in “tax” stock trading, which is often micro-stock stocks traded by retail investors, suggesting that this is not a problem that mutual funds need to worry about.
However, today’s data suggests that this is incorrect.
Trading transactions are very high
In fact, the rise of non-trading transactions is very common, affecting the stocks that many mutual funds also try to buy in large quantities. Non-traded trading volumes of all market capitalization exceed 45%, including stocks with all prices and exchange-traded funds.
No matter how you cut it, the non-exchange share has increased significantly since 2019.
Figure 1: Stock share of all stocks has risen since 2019
Rise is mainly driven by bilateral transactions – not black pool
Interestingly, if we look at the Black Pool (ATSS) and other non-transactional (mainly bilateral) transactions separately, we will find that the Dark Pools Markets Market share has remained wrong since at least 2019.
This means that growth comes from companies that fill spread cross-orders (usually increasing prices) and negotiate deals.
To be fair, the majority of the deal is retail, which has grown significantly since Covid and free commissions. However, retail does not account for all transactions that are not traded.
Figure 2: Bilateral (non-ATS) sees almost all non-exchange share increases since mid-2019 (at least)
There are fewer processes for asset managers to interact with them
Importantly, for mutual fund managers, these bilateral transactions represent liquidity that they usually cannot interact with.
You might think that this is just the average of a few “retail babies”. But actually, looking at all the stocks in the Russell 3000 index, we see that few exchange shares are now below 30% (or, another way of saying it is expressed in more than 70% of exchanges).
Most stocks trade between volumes between 40% and 50%, regardless of the stock price (horizontal axis) or market value (circular dimensions).
Figure 3: Accessible traffic from asset managers
At the very least, this could mean that purchase orders using “VWAP” or participating algorithms will actually be more aggressive than active transactions in the market, which can increase transaction costs.
It may also increase search and signal costs when the router navigates fragmented hidden liquidity, and opportunity costs due to missing padding.
It may be time to reduce regulations that cause unnecessary divisions
Light-up prices, fair channels and competitive NBBO are features that make the stock market different from other markets. American families rely on a vibrant public stock market to gain their financial security.
Regulators may take for granted because the market is illuminated. As economics prefers darkness over lighting markets, global market share has been declining globally.
For institutional traders trying to navigate the market segments through large transactions, splitting makes it more difficult to find liquidity. Segmentation means less liquidity than traders think. Both can increase trade costs and reduce returns on active funds.
Research also shows that companies with larger spreads will also have higher capital costs, which will reduce investment in the U.S. and global economies.
Academic research shows that there is a turning point above the market quality and spread that may be in the darkness of 10% to 46.7%. Now, the U.S. market is violating all these levels.
