Dark pools to face more scrutiny


For most of the past year or so, the conventional wisdom has held that scrutiny of dark pools would heat up and that some sort of regulatory action would eventually come down the pike. It's no secret that the SEC and Finra want to step up their ability to monitor market action in dark pools. 

The criminal indictment of Mathew Martoma, which implicated his former employer Steven Cohen, founder of SAC Capital, also shed light on how the hedge fund was able to use algorithms and dark pools to minimize market ripples from some of their massive trades. For dark pool supporters, which include most Wall Street broker dealers (which run dark pools), this is all mere character assassination and guilt by association. It's fair to say that dark pools continue to be unfairly blamed for lots of ills. 

A recent commentary in CNBC notes that, "Well, besides the direct fairness and criminality questions, dark pools are part of the whole 'rise of the machines' fear, tweaked in a big way by the Flash Crash, that seems to have cast a pall over retail investing. Market volume over the past few years has drifted off, leading to a lot of hand wringing by retail brokerages and, frankly, us media types. Sure, a bad economy and lousy market share blame. But the pervasive feeling that HAL or Skynet or Robbie the Robot are playing in the casino leads many of us to stay away from the casino as well." 

The reality is that most retail orders are fulfilled via internalization by a wholesaler. And it's more than fair to say that by most metrics, retail investors have gotten a fair shake from this form of execution. Indeed, such success prompted the main exchanges to fight fire with fire by embracing dark pool concepts as part of exchange-based services. 

All that said, I think the issue will come alive from a regulatory point of view again sometime this year. I hope for a dispassionate substantive debate devoid of flowery rhetoric.

For more:
- here's the article

Related articles:
Dark pools and SAC Capital
Dark pool industry hurts itself in 2012