BASEL, Switzerland (Reuters) - The increasing use of dark pools, or venues where stock trades are hidden from public view, is a growing concern for regulators, the top U.S. securities regulator said on Thursday.
While there are legitimate reasons for market participants to maintain anonymity and engage in trading without moving the market, dark pools may lower the quality of publicly available information, Securities and Exchange Commission Chairman Mary Schapiro said.
“The SEC is considering whether the dark pools need more light,” Schapiro said in a speech at an International Organization of Securities Commission conference in the Swiss city of Basel.
Later she told Reuters: “I think we are likely to propose some action.”
Dark pools allow traders, especially of large blocks of stock, to hide their intentions and avoid moving share prices. They have gained traction over the last decade as the average size of trades dramatically decreased on the transparent exchanges.
The United States has 40 such venues, but dark pools have also grown in Europe and elsewhere.
Schapiro said some pools were not dark to all market participants but rather transmitted electronic messages to select individuals that could convey valuable information about their available liquidity.
This could lead to significant private markets that excluded public investors, she said.
“Such a two-tiered market would be inconsistent with the fundamental principles of fairness and efficiency that guide U.S. market structure policy,” Schapiro said.
The SEC has begun in-depth review of recent market developments such as flash orders, high-frequency trading and direct market access.
Direct market access happens when trading firms use a broker’s identification to submit orders directly to capital markets. Flash trades occur when exchanges send trade orders to a select group of participants a fraction of a second before revealing them publicly. High-frequency trading is a split-second stock trading strategy.
Reporting by Sven Egenter with additional reporting by Huw Jones and Rachelle Younglai; editing by John Stonestreet and Matthew Lewis