Dark pool identity exposure: More harm than good?

When a dark pool (dark pool news) executes trades, these trades are reported via the NYSE Euronext, Nasdaq OMX or via FINRA's alternative display facility. But these trades are classified as over the counter trades, which means that "the identity of the dark pool that executed the trade is not publically disclosed," notes Advanced Trading.  

It might appear to be a no-brainer that releasing information as to which dark pool executed the trade would boost transparency and thus be good for the markets. Sunlight is always best, right? Well, the SEC (SEC news) has proposed as much, but the industry is putting forward the view that such disclosure may have some unfortunate, unintended consequences. 

The danger in the mind of some is that these tiny "footprints" contain some valuable information that could be pieced together only by the most technologically advanced traders, such as high-frequency traders (high-frequency trading news). This information would yield clues that these traders can use to somehow gain an unfair advantage by discerning a block trade and trading quickly on that information.  

This has some traditional traders aiming to scale back the SEC's zeal for transparency. Fidelity Investments and the Teacher Retirement System of Texas are just two traditional buy-side players with deep reservations about too much disclosure, reports Dow Jones.  

The very reason they rely on dark pools after all is to minimize the impact of their trade and keep others in the dark. Anonymity is the point. But the new disclosure threatens that. Sophisticated traders can get to perceived liquidity much faster than the traditional buy side, and that can amount to a kind of gaming in the eyes of some. 

For this reason, the SEC's proposal would exempt the identity of a dark pool or any other ATS executing a block trade with a market value of at least $200,000. The action with high-frequency traders is in smaller orders, and that's where traditional buy-side players will gain the most advantage.

So all of this begs the question does the solution do more harm than the problem it was intended to fix? There are many people who no doubt think that the more information disclosed, the better off the market will be. We may end up with some sort of compromise system, whereby dark pools are identified but only after a lag time. Some would favor end of day reporting. Others might favor end of week reporting. Or we might get a lower threshold for exempted trades. You get the feeling that the SEC will have to adjust their proposal. - Jim