The Dark Side of the Pools (Part 3)
The Health Markets Report recommends a variety of reforms, ranging from regulatory intervention to self help. The most profound suggestion is only tangentially related to Dark Pools. Investors need the information needed to assess best execution, irrespective of the trading venue. As the Report notes:
- investors also need more and better data about order routing and executions. Investors should be able to quantitatively test the quality of the services available to them. While private industry efforts are currently pushing data availability forward, there have not been any organized, concerted efforts to establish data standards, impose clock synchronization standards, or require brokers to make critical data available to investors.
Nonetheless, in the absence of this type of information, investors are left with the need to take prudent steps designed to reduce but not eliminate risk. These include:
Demanding Better Disclosure. "Investors should demand better public and private disclosures. To the extent possible, these disclosures should be standardized across market venues. Investors need to know how dark pools operate and how their orders are handled. At the same time, investors and regulators need to have high-quality order routing and execution data against which to test brokers’ and venues’ performance."
Mitigating Conflicts of Interest. "Investors should demand lesser conflicts of interest from dark pools and their operators. Investors should make informed decisions about the risks of interacting with dark pools that have an affiliate trading for profit in the pool, and should determine whether or not those trading operations are adequately disclosed. Even with disclosure, the risk of abuse remains high."
Updating Policies. "Investors should update and modernize their practices regarding best execution and fiduciary obligations. This is essential for investors to minimize their trading costs and fulfilling their fiduciary obligations to their clients."
Rewarding Less Conflicted Venues. "Over the long term, investors should continue their efforts to promote independent alternative trading venues whose business models are better aligned to protect the interests of their underlying customers. In addition to providing higher quality venues for investors, these efforts may act as a powerful catalyst to drive reforms at other trading venues."