The dark pool industry and the buy-side community are still pondering the scandal at Pipeline Trading Systems, which agreed last month to a cease and desist order to stop some shocking practices that threaten to make the company a pariah.

Recall the SEC somehow got wind--and it would be interesting to know this all unfolded--that Pipeline Trading's ballyhooed ATS was in fact a mere storefront to a proprietary trading operation. According to the order, the dark pool served as a front-end to an undisclosed trading subsidiary that "was entirely owned and funded by Pipeline, which it created to provide liquidity to Pipeline's customers. In short, while customers were led to believe they were interacting with other buy-side players, they were in fact trading with Milstream Securities."

The SEC also charges that Milstream "sought to predict the side and price of Pipeline customers' orders and then trade on the same side as those orders in other trading venues before filling them on the ATS." It doesn't get much more abusive.

Fortunately, this does not appear to be a widespread practice. We hope not anyway. But there is an on-going probe, and we may see more questionable activities bubble up. Given that this is a company-specific issue, it's only natural to inquire as to whether the company will survive.

Pipeline's new chairman, LiquidNet alum Jay Biancamano, seems to be making the right moves. He has replaced the former executives Fred Federspiel and Al Berkeley, who were each personally fined $100,000. He has also cut off Milstream's access to the dark pool and has announced plans to sell the trading unit. In short, he aims to make the Pipeline service legitimate. But it will likely be a hard sell, at least initially. He acknowledged to the Financial Times that customers were staying away for now. Log-ins to the system have apparently fallen 25 to 30 percent. Volume must be down.

"We're looking to re-establish ourselves as a trusted broker by making significant changes here," Biancamano told the paper. "We're looking to get back on the good graces of the buy-side. Other firms have recovered from more, others have suffered from less."

One consequence is that we might see buy-side firms seek more information from dark pools, especially noninternalized dark pools, about how trades are filled and how they are handled once they hit the system. Dark pools would be wise to share more of this with customers who feel burned. -Jim