Wall Street's Great Escape: Off-Exchange Trading Surpasses 50% in Transformative Shift

The U.S. stock market, the world's largest public equity marketplace, is undergoing a remarkable transformation as a significant shift towards off-exchange trading emerges. As of January 2025, an unprecedented 51.8% of American stock trading volume has taken place off-exchange, marking the first time more than half of trades have occurred outside established exchanges. This milestone follows five consecutive months of record highs in off-exchange trading volume, highlighting a profound shift in trading dynamics.

This surge in off-exchange activity is primarily occurring within large financial institutions or via alternative platforms known as "dark pools." According to Anna Ziotis Kurzrok, market structure head at Jefferies, this migration from traditional exchanges to off-exchange venues represents a potentially enduring trend. Although off-exchange trading has been a component of Wall Street's ecosystem for years, exchanges like the New York Stock Exchange and NASDAQ have traditionally dominated the scene. The current shift challenges conventional pricing mechanisms, which primarily relied on exchange-based quotes for stock valuations.

Market structure expert Larry Tabb notes that this change is a continuation of a long-standing trend. If it persists, it could significantly impact market operations. Tabb highlights that increased off-exchange trading may reduce the number of orders competing for the best price in public markets, potentially decreasing pricing efficiency both within and outside traditional exchanges.

In response, the U.S. Securities and Exchange Commission (SEC) has attempted to counter this trend by proposing reforms to market structure intended to entice trading back onto public exchanges. Of these reforms, only two have been enacted, addressing stock pricing strategies and the execution of trades across different venues. Despite these efforts, threats to market efficiency remain relatively contained, as 48.2% of trades still occur on public exchanges as of January.

An analysis by Jefferies suggests that the rise in off-exchange trading is influenced by increased trading of stocks valued under one dollar, often facilitated by market-making giants like Citadel Securities and Virtu Financial. Adjusted for these low-priced stocks, off-exchange trading accounts for less than 40% of total volume, which Jefferies interprets as a sign that this shift does not necessarily portend a deterioration in trading conditions.

Additionally, there is a growing presence of Alternative Trading Systems (ATS), offering alternative, anonymous transaction mechanisms. These systems match buyers and sellers without exposing expected prices on public exchanges, allowing institutional investors to avoid information leaks that could affect prices. ATSs have seen a significant increase, with November's average daily volume reaching 1.7 billion shares, the highest since March 2020, signifying a 36% year-over-year growth. Joe Saluzzi of Themis Trading notes that these new trading methods provide large institutions with enhanced trade execution and value.