What Is Go Around?
"Go around" in finance refers to the practice where a broker-dealer attempts to execute a client's order at a better price or with less market impact than what is immediately available on publicly displayed exchanges. This strategy falls under the broader category of market structure and is a common consideration in the realm of order execution. While appearing counter-intuitive to the idea of consolidated markets, the ability to "go around" publicly displayed prices can be crucial for institutional investors seeking to transact large blocks of securities without adversely affecting the market price. This practice often involves routing orders to venues like dark pools or other alternative trading systems (ATS) where order information is not publicly displayed until after execution.
History and Origin
The concept of "go around" is intrinsically linked to the evolution of securities trading and the regulatory landscape designed to govern it. Historically, before the advent of modern electronic trading and consolidated market data, trading was more fragmented. Brokers often sought the best price for their clients by contacting various dealers or exchanges. The formalization of market structure, particularly in the United States, saw significant developments with regulations like the Securities and Exchange Commission (SEC)'s Regulation NMS (National Market System), adopted in 2005.4 This regulation aimed to modernize and strengthen the U.S. equity market by ensuring investors received the best price execution for their orders.
Regulation NMS introduced the "Order Protection Rule," which generally requires trading centers to prevent the execution of trades at prices inferior to protected quotations displayed by other trading centers.3 This rule significantly impacted how orders are routed. However, the rule also contains exceptions and allows for various order types and routing strategies, which can implicitly permit a "go around" under certain conditions, particularly when attempting to achieve a superior outcome for large orders that might move the market if simply executed against the National Best Bid and Offer (NBBO). The proliferation of ATS platforms and high-frequency trading (HFT) firms further complicated the order routing landscape, leading to a dynamic where sophisticated brokers might "go around" the lit markets to find better liquidity or price.
Key Takeaways
- "Go around" is a brokerage practice where orders are routed away from publicly displayed prices to seek better execution.
- It is often employed for large institutional orders to minimize market impact.
- This practice is closely tied to the existence and operation of dark pools and alternative trading systems.
- The goal of a "go around" is to achieve a price that is equal to or better than the best available price on public exchanges.
- Regulatory frameworks, such as Regulation NMS, influence the conditions under which orders can "go around" displayed quotes.
Interpreting the Go Around
The interpretation of "go around" largely depends on the perspective of the market participant. For a broker, a successful "go around" means achieving a superior price for their client, demonstrating their commitment to best execution. This can involve securing a price inside the existing bid-ask spread or executing a large order without causing significant price dislocation. From a broader market efficiency standpoint, frequent "go around" activity can contribute to market fragmentation, as a significant portion of trading volume occurs away from public view, potentially affecting price discovery on lit exchanges. Regulators continuously monitor these practices to ensure fairness and transparency across all trading venues.
Hypothetical Example
Imagine a large institutional investor wants to sell 500,000 shares of XYZ Corp. The current NBBO is $50.00 bid / $50.05 offer. If the institution were to place a large sell order directly on a public exchange, it might trigger a significant price decline as it overwhelms the available buy orders at $50.00, potentially causing the price to drop to $49.95 or lower.
Instead, their broker decides to "go around" the public market. The broker might first check various dark pools or directly contact large market maker firms to gauge interest in such a large block. They might find a buyer willing to take the entire 500,000 shares at $49.98 per share, which is technically lower than the public bid of $50.00. However, by executing the entire block at once through a "go around" strategy, the investor avoids the potential for a cascading price drop on the public exchange, which might have resulted in an average execution price far lower than $49.98. The broker successfully minimized market impact by finding an off-exchange counterparty.
Practical Applications
The "go around" strategy is primarily applied in institutional trading, particularly for large orders that could significantly impact market prices if executed conventionally. It is prevalent in scenarios involving:
- Block Trading: Large institutional orders where a single buyer or seller needs to move a substantial quantity of shares without disrupting the market.
- Minimizing Market Impact: Reducing the adverse effect that a large order can have on a security's price. By "going around" lit markets, the order's presence is not immediately visible, preventing other market participants from reacting to it.
- Accessing Hidden Liquidity: Many dark pools and alternative trading systems exist specifically to facilitate large trades without pre-trade transparency. Brokers use "go around" tactics to tap into this hidden liquidity.
- Algorithmic Trading Strategies: Sophisticated algorithmic trading programs often incorporate logic to determine when and how to "go around" public exchanges to achieve optimal execution, sometimes leveraging various order types available in non-public venues.
- Regulatory Compliance: While seemingly designed to bypass public displays, "go around" practices must still comply with regulations like Regulation ATS, which governs alternative trading systems.2 These regulations dictate requirements for transparency and access for ATS, balancing efficiency with market integrity.
Limitations and Criticisms
Despite its perceived benefits for large orders, the practice of "go around" and the broader ecosystem that supports it face several limitations and criticisms:
- Reduced Transparency: The primary concern is the lack of pre-trade transparency. When a significant portion of trading occurs in dark pools through "go around" tactics, public exchanges may have less information, potentially hindering efficient price discovery.
- Market Fragmentation: Critics argue that the ability to "go around" contributes to market fragmentation, making it more challenging for investors to get a complete picture of available liquidity and potentially complicating regulatory oversight. Some argue that despite efforts to consolidate, the system still encourages fragmented trading.
- Potential for Information Leakage: While designed to prevent information leakage, the process of finding counterparties in dark pools or off-exchange can still carry risks of sensitive order information being exposed to select market participants, potentially leading to front-running or other predatory trading behaviors.
- Complexity and Cost: Navigating a fragmented market, including when and how to "go around" public venues, adds complexity and technological costs for broker-dealers who must connect to multiple trading venues.
- Fairness Concerns: Some argue that the prevalence of "go around" practices creates a two-tiered market, where large institutional players have access to different trading avenues and potentially better prices than retail investors. This raises questions about market fairness and equality of access to liquidity. Events like the GameStop trading frenzy in early 2021 highlighted broader concerns about market structure and the treatment of retail investors.1
Go Around vs. Trade-Through
The terms "go around" and "trade-through" are related but distinct concepts in market structure and order execution:
| Feature | Go Around | Trade-Through |
|---|---|---|
| Definition | A broker's practice of seeking to execute an order away from public exchanges, often to obtain a better price or minimize market impact. | The execution of an order at a price inferior to a publicly displayed, protected quotation on another market. |
| Intent | To achieve optimal execution, potentially inside the public spread, or for large blocks to avoid market impact. | Typically an undesirable outcome, often due to latency, poor order routing, or a failure to respect the NBBO. |
| Legality | Generally permissible under specific rules (e.g., in dark pools or for certain order types) if it results in best execution. | Generally prohibited by regulations like Regulation NMS's Order Protection Rule, with limited exceptions. |
| Transparency | Often involves non-transparent venues (e.g., dark pools) where pre-trade quotes are not public. | Occurs on transparent or lit exchanges, but the execution happens at a price worse than a publicly available quote elsewhere. |
While a "go around" seeks to avoid a negative market impact or secure a better price by sidestepping public displays, a trade-through is the failure to achieve the best available public price. The regulatory framework, particularly Regulation NMS, is designed to prevent trade-throughs while accommodating various order execution strategies, including those that involve "going around" publicly displayed quotes when consistent with best execution principles.
FAQs
Why would a broker "go around" public exchanges?
A broker would "go around" public exchanges primarily to achieve better order execution for their clients, especially for large orders. This helps to minimize the price impact that a large trade might have if executed on a public exchange and allows access to hidden liquidity in venues like dark pools.
Is "go around" legal?
Yes, "go around" is generally legal, provided it complies with regulations governing order execution and market access, such as Regulation NMS. The key is that the broker must still uphold their duty of best execution for the client's order.
How does "go around" affect retail investors?
For individual retail investors with small orders, "go around" practices typically have little direct impact, as their orders are generally routed to public exchanges or wholesale market makers for immediate execution at or better than the NBBO. However, the overall effect of "go around" on market structure and transparency can indirectly influence the broader market dynamics that affect all investors.