The biggest dark pool myths


Dark pools have taken their hits in the court of public opinion as of late. And many think the SEC will take a closer look at these liquidity centers as part of a larger review of our overall market structure sometime this year.

In the meantime, critics will continue to lambaste these services as engine of fragmentation, while the supports aim to clear the air. In the latter camp, the CEO of PQ Enteprises offers on CNBC a Top 10 list of dark pools myths, which struck me as entertaining and instructive. Some examples:

  • No. 10. "The biggest reason people are afraid of 'Dark Pools' is the name, like a kid being stuck in a closet by a mean sibling, the image is frightening. Maybe they should be called 'Block Trading Venue for Institutional Traders Who Know What They are Doing'. BTVITWKWTD -Doesn't exactly roll off the tongue does it?"
  • No. 7. "More volume is trading in the Dark Pools because it works for institutions. The percentage of non-exchange trades has grown to roughly 33 percent of all trades up from 8-10 percent a decade ago; this is because the users of Dark Pools have had a better experience in the dark than at an exchange."
  • No. 1. "It is not a 'Black Market,' it's just not displayed. Many comments in the media imply that Dark Pools are the "wild wild west" and anything goes; every man and woman for themselves, customers are exploited, brokers make tons of money. This is not the case."

But the list may have missed the biggest misconception of all--that most retail trades are overtly harmed by dark pools. The reality is that most retail trades nowadays are now executed in the dark. Most of these orders move from front-end retail brokerages to wholesalers, who internalize them aggressively. The result, most would agree, is that retail investors get very good terms when they trade.

That said, there are other issues, such as fragmentation and oversight that factor into the debate.

For more:
- here's the article

Related articles:
Dark pools to face more scrutiny
Poorly named "Shadow banking" is still hotly debated

Filed Under