Dark pools march into the light


I often wonder: If the men and women who created the first dark pool could go back in time, would they take a little extra time to think of a better name than 'dark pools?'

Something less threatening and foreboding, perhaps?

This thought came to mind while reading the Wall Street Journal's rather cogent analysis of these unlit trading venues. In Regulator Probes Dark Pools, Scott Patterson shows why the federal regulators are taking such a keen interest in dark pools these days. In an age where every bank must achieve transparency, more and more traders are vying for unlit venues where you only discover who is on the other side of a trade after the deal is done.

As Patterson puts it:

"Dark pools have been a source of controversy, especially as they have grown to handle about one in seven stock trades.

One reason: Most users, as well as regulators, don't know what is taking place. Unlike stock exchanges, which are regulated by the Securities and Exchange Commission, the trading venues aren't required to regularly tell market regulators details about how they handle orders.

This, one can argue, goes against the very idea of transparency - and regulators want more light. As Patterson reports, "In January, Finra Chief Executive Richard Ketchum told The Wall Street Journal that Finra is expanding its oversight of dark pools, with an eye on whether the orders placed in public exchanges are 'trying to move prices or encourage sellers that may advance their trading in the dark market.'"

This demand for more light is going to turn into a delicate dance between the brokers and the banks' risk and IT departments. After all, how much can you show your hand in a deal that takes place in sub-seconds? Also, what do these measure to the idea that technology is a bank's competitive advantage? In an effort to level the playing field, regulators may force big banks to innovate themselves out of competition.

Maybe in a few years, some will look back at this period being the "Good Ol' Dark Days."

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