Tomorrow the finance ministers of E.U. countries are set to endorse legislation that would compel transactions in privately owned venues (known colloquially as dark pools) into an organized system of trade. In the meantime in the U.S., FIRA sent letters last month to fifteen companies, seeking information on how they handle their dark pools and what they reveal to clients.
The proliferation and growth of dark pools should concern anyone who buys or sells shares, not to mention workers whose retirement accounts hold stocks in mutual funds. Evidence is mounting that trading in dark pools increases the odds that buyers and sellers won’t easily find each other, so investors can lose out on the best possible prices.
The companies that own dark pools haven’t exactly made it easy to figure out what happens on their private trading systems: Credit Suisse Group AG, whose Crossfinder service is the biggest U.S. dark pool, in April stopped reporting the number of transactions it processes. About a dozen other dark pools already keep mum about their trading, and there is nothing to stop the rest from joining the silence. This would further obscure the transparency that has helped make American capital markets the most appealing in the world.
Dark pools arose in the 1980s when the Securities and Exchange Commission said brokers could bring together buyers and sellers to trade anonymously. Rather than routing customer orders to the traditional exchanges, brokers could send them to an outside trading service or execute orders on their own internal systems, pocketing the spreads on prices and trading fees. Today, as much as 40 percent of trading in U.S. equities takes place away from the public stock exchanges.