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.

That’s 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 ongoing debate.  

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 Europe.