The Dark Side of the Pools (Part 1)
Market structure remains a significant issue. With dark pools, registered exchanges, and internalizers, the number of trading centers has proliferated. The percentage of trades in the dark markets has increased. At the same time, the trading in the lit markets has become less centralized, with the NYSE, Bats and Nasdaq each taking about 20% of the market.
Some of the concerns that have arisen are technological. Trading centers can break down, as happened recently at the NYSE. But as Healthy Markets ("a not-for-profit association of institutional investors working together with other market participants to promote data-driven reforms to market structure challenges") recently highlighted in a report, The Dark Side of the Pools, substantial concern remains with the lack of transparency in the dark markets.
Trading in the dark markets has increased significantly over the last decade. As the SEC noted: "from February 2005 to February 2014, the collective share of dark venue trading in NYSE stocks increased from 13% to 35%, and the collective share of dark venue trading in NASDAQ stocks increased from 29% to 39%."
Despite the ominous sounding name (perhaps dark pools as a group should put in for a name change), the growth reflects market demand. As the Healthy Markets Report noted:
- For institutional investors, the need for dark pools has never been greater. High-speed traders armed with cutting-edge technology have grown stunningly adept at identifying, exploiting, and profiting from large orders. To gain even more of an edge, some of these high-speed traders have been awarded special—and sometimes secret—privileges from market centers, such as greater or faster access to information, or specialized order types.
Yet despite this demand, concern continues over the practices of dark pools. Many are chronicled in the review by Healthy Markets of the recent cases brought by the SEC (against Pipeline, UBS and ITG) and the NY AG (Barclays and Credit Suisse). We will discuss some of these concerns in the next several posts.