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.

That’s 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 activity.

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 today’s 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 disadvantage.

“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.

....