Recent developments that call into question dark pool
trading activities may not deter institutional investors from
seeking out alternative trading venues and taking full
advantage of their benefits. The most recent development saw
the Securities and Exchange Commission fine dark pool operator
eBX which runs Level ATS $800,000 in October
for allegedly failing to protect customers confidential
trading information. But if more such cases arise, investors
will likely start looking more closely at whether the venues
deliver what they promise.
Thats the finding of Woodbine Associates, a capital
market research and consulting firm based in Stamford,
Connecticut. It advises clients on dark pool selection and
released a report in September on current dark pool trading
Despite SEC charges brought against eBX, institutional
investors need dark pools more than ever today, says
Matthew Samelson, principal at Woodbine Associates. Samelson
points out that because todays traditional display
markets such as the New York Stock Exchange or Nasdaq trade at
lightning-fast speeds, the buy-side institution that is not a
low latency or high frequency trader is at a distinct
It behooves these institutional traders to trade in
dark pools where they have some control over who they interact
with, can have anonymity and more protection against leakage
than one gets in the display markets and thus, can achieve some
kind of trading price improvement, he said. Currently,
there are more than 40 dark pool trading venues operating in
the United States.
As an example of dark pool benefits, Samelson said that a
firm that wishes not to interact with high frequency trading
flow or with another type of counterparty can depending
on the dark pool they use utilize controls to
achieve that goal.
According to Dark Pools: Characteristics, Operations
& Liquidity, an analysis of 25 different dark pool
trading venues issued by Woodbine Associates in September,
off-exchange transactions account for 27 percent to 34 percent
of all U.S. equity securities volume, with dark pools
representing a smaller but persistent proportion of that
volume, growing from 8 percent of the consolidated tape share
volume in 2008 to approximately 13 percent today.
But if institutional investors continue to trade in these
opaque trading venues, is there a way for them to avoid
Samelson says that for now, their options are limited.
If someone misrepresents something to you, either by
omission or intentionally, there is no way you can find out
whats really going on, short of doing your own internal
audit of the situation, he said.