Dark pool auditing services may rise


It's fair to say that the dark pool industry has taken some big hits to its reputation as of late.

The SEC fined eBX, which runs Level ATS, $800,000 last month for failing to protect confidential trading information and making it available to a third party concern that used it for business purposes. Last year, Pipeline Trading Systems agreed to pay a $1 million fine to the SEC to settle charges that it failed to disclose that a majority of customers' orders were not handled as advertised. Indeed, many went to a subsidiary of Pipeline, Milstream, which traded against the orders for its own account.

The fact that such practices flourished was a shocker to many. Obviously, the industry has some major trust issues to deal with. To grapple with such issues, Woodbine Associates "sees a business opportunity and is looking into the possibility of conducting trading audits and validating the operations of dark pool venues for the benefit of institutional clients," reports Institutional Investor.

It noted that, "The validation service would be provided to and paid for by dark pool operators who hope to attract and retain their institutional trading customers. It could involve a comprehensive review of business processes or alternatively, a more selective review and audit of the code underlying their matching engine to validate that the way management or a sales team says an offering works is truly the way it operates."

Some sort of audit services seems necessary these days. Woodbine says it in talks with various dark pools to provide such audit services. What this calls for are some strict benchmarks that can help determine success. If the dark pool is paying for the service, there is a chance that they will craft reports that paint it in the most favorable light. It would be hard to call this objective, though the effort on this is welcome. Other options may bubble forth soon, perhaps even a regulatory solution.

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