Investment conference levels heavy criticism of dark pools

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The Investment Company Institute, the powerful lobby for the mutual fund industry, held an online conference recently about market structure, during which the issue of dark pools cropped up.

As noted by Traders magazine, "Conference participants took aim at a host of ills allegedly brought on by dark pools, including harming the price discovery process, information leakage, a lack of information about fees, and a low level of price improvement."

But there are a few twists as this old debate continues. Exchanges increasingly are taking nuanced positions when it comes to dark pool-like functionality. While they have historically led the charge against dark pools rhetorically, exchanges have come around to the view that they cannot beat them, therefore, they have to join them.

The NYSE Retail Liquidity Program is the best example of a major exchange that aims to embrace various aspects of dark trading to attract more retail customers. Most exchanges are trending in this direction. All the while, they have continued to criticize dark pools, but for different abuses.

One exchange executive noted, "The main driver of the creation of many, many dark pools was to limit information leakage. But we find dark pools are no longer protecting information."

He said that some dark pool users were obtaining information by interacting with orders in dark pools and then using that information to make a trading profit in the broader market. There have been some high-profile cases of unauthorized information sharing. The most prominent example was Pipeline Trading, which was accused of being a mere storefront to a proprietary trading operation that "was entirely owned and funded by Pipeline."

In addition,  eBX, which operates the LeveL ATS, was accused by the SEC of misrepresenting to customers that their order flow details would be kept onfidential and not shared with outsiders. The company apparently allowed an outside technology firm to use information about LeveL subscribers' unexecuted orders for its own business purposes, notably order routing decisions. The dark pool debate has morphed a bit, that's for certain.

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