Get ready for the regulatory debate to heat up regarding
dark pool or nonexchange trading, a practice that currently
represents a third of U.S. equity trading and is generally
viewed as a benefit to institutional investors seeking to
minimize the impact of large block trades, and a possible
uptick in trading costs.
With three dark pools or off-exchange venues in the U.S.
Pipeline, Level ATS and Liquidnet coming under
regulatory fire of late for disclosure issues, questions and
concerns continue to be raised about dark pool practices and
regulatory changes are expected.
Thats the finding of a new TABB Group report entitled
A Spotlight in the Dark: An Inevitable Debate.
Like it or not, we believe the rules surrounding
off-exchange trading in U.S. equities will change; it is only a
matter of time, says Miranda Mizen, a TABB Group analyst,
author of the 18-page report and a former senior vice president
of transaction services at the American Stock Exchange.
Mizen notes that regulators in Canada, Europe, Australia,
Asia and Latin America have proposed or are putting into place
new rules to favor market transparency and consolidation at the
same time that questions are being raised about whether or not
dark or off-exchange trading hinders price discovery. In such
venues, trading is designed to be anonymous and prices are made
public only after trading is done.
The TABB Report comes on the heels of new research conducted
by professor Haoxiang Zhu at the MIT Sloan School of Management
and issued in November Do Dark
Pools Harm Price Discovery? that
concludes that adding a dark pool alongside a traditional,
lit exchange actually tends to improve price
discovery efforts. It is just one of many academic reports on
the topic that analyze the varieties of off-exchange trading,
many of which draw different conclusions and add fuel to the
The TABB report surveys the growth of dark execution,
estimating that 30 to 33 percent of all equity trading in the
U.S. now takes place off-exchange, either in independent dark
pools run by firms such as Liquidnet or off-exchange venues run
by broker-dealers. Currently, Barclays, Credit Suisse, Goldman
Sachs and UBS all operate their own internal dark pools or
off-exchange venues, accounting for an estimated 13 percent of
all equity trading volume in the U.S. and 9 percent in