InvestmentMAGE's Blog : What Does Dark Pool Liquidity Mean?

Financial Times

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Macroeconomics & markets
Dark pools

Published: October 22 2009 14:56 | Last updated: October 22 2009 20:55

Can you shed light but leave everyone in the dark? The Securities and Exchange Commission on Wednesday trumpeted three proposals to increase transparency in dark pools alternative trading systems that do not display quotes publicly but account for about 8 per cent of US equity volume. In announcing possible changes without full details, expected next week, the result was confusion. Those operating pools dedicated to trading large blocks of shares suspected that broker-operated dark pools, which rely heavily on algorithmic trading, would suffer. In fact, the four largest pools, which account for perhaps half of dark pools average daily volume, all seem unlikely to face much disruption.

The SEC took aim primarily at so-called indications of interest, or IOIs, which solicit orders by sending information to selected market participants and so create fears of a two-tier market rather like flash orders. But only a small group of pools sends IOIs. Some that do, such as Liquidnet, will be exempt from the proposed rules because they trade large blocks of shares. Knight Link, a large pool of off-exchange liquidity, may not be subject to the SECs changes because it is not technically an ATS. Meanwhile, the two biggest dark pools, operated by Credit Suisse and Goldman Sachs, do not send out IOIs. That means a requirement to display information publicly at a much lower volume threshold would not apply to them.

The SEC is eyeing other measures, remaining notably quiet, for example, on broadening access to dark pools. That the regulator is taking a nuanced approach in examining the structure of equity markets is welcome. But in reality, precious little valuable trading information, to use the SECs phrase, looks set to go public as a result of these proposals. No need for sunglasses.