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If institutional investors ruled the world, all their big stock trades would be done in secret. There’d be no in-the-know sellers jacking up prices or tipped-off buyers making low-ball bids; instead, just smooth, black-box transactions that only take place if buyer and seller are independently in sync on a price. In short, it would be exactly like the trades now conducted through “dark pools” — independent electronic trading venues that anonymously match buyers and sellers of stocks while keeping both parties’ intentions known only to themselves.
Despite their name, dark pools operate entirely above board. However, in the current environment, that’s not always enough. And so it is that these private hubs are coming under scrutiny from the Securities and Exchange Commission in the U.S., which recently proposed new rules to make their activities more transparent. The SEC’s primary goal, of course, is to ensure fair markets and fair trading for all. As such, their biggest concern in this instance, according to chairman Mary Schapiro, isn’t so much pure dark pools as it is those best described as “grey” pools — specifically, venues that distribute information about buy and sell orders to a small, select group of parties and, in the process, potentially place other users and the investing public at a disadvantage. Under the SEC’s proposals, such disclosures would have to be reported to everyone.
In Canada, dark pools trading isn’t as developed, accounting for barely 1% of total trading volume compared to about 8% in the U.S. Grey pools don’t even exist here. Yet Canadian regulators seem intent on ensuring the trading venues don’t become a problem, and are in the midst of soliciting feedback. Stay tuned.
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