June 19, 2009 / 12:41 AM / 10 years ago

U.S. SEC says "dark pools" are emerging risk to market

NEW YORK (Reuters) - U.S. securities regulators are investigating ways to bring light to so-called dark pools, automated trading systems that do not display quotes publicly, the head of the Securities and Exchange Commission said on Thursday.

Dark pools, where orders are anonymously matched so that traders do not alert the wider market to their intentions, have triggered concerns that stock pricing may not be transparent and that a privileged few are benefiting.

The lack of post-trade transparency makes it difficult for the public to assess dark pool trading and to identify pools that are most active in particular stocks.

“This ... has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially,” SEC Chairman Mary Schapiro said in remarks prepared for delivery to the New York Financial Writers Association.

“The lack of reliable information can prompt speculation and suspicion about the basis for market fluctuations,” she said. Dark pools, she said, are among the emerging risks to investors and markets that the SEC is focusing on.

Schapiro said the SEC will be taking a “serious look” at what regulatory actions may be needed to respond to the potential investor protection and market integrity concerns raised by dark pools.

Nasdaq OMX’s Nasdaq Stock Market and BATS Exchange, which together represent about a third of U.S. equity trading, this month began sending “flash” orders to private groups of select market participants before routing them to rival venues. The moves, which amplified the dark pool debate, drew criticism from the Securities Industry and Financial Markets Association and from NYSE Euronext, the parent of the New York Stock Exchange.

It is estimated that dark pools account for less than 9 percent of U.S. stock trading.


Schapiro said all financial professionals who provide investment advice should have a fiduciary duty to their clients

— a measure also proposed under the Obama administration’s plan to reform financial regulation.

This would place a higher standard on broker-dealer conduct and require them to always act in the customer’s best interests when recommending products. Investment advisers already have fiduciary duties.

“When investors receive similar services from similar financial service providers, they should be subject to the same standard of conduct — regardless of the label applied to that financial service provider,” Schapiro said.

Currently, investment advisers comply with a different set of rules than broker-dealers even though the two industries have developed to the point where they are relatively indistinguishable to an investor.

Investors can get advice from a number of different financial professionals including investment advisers, financial advisors, financial consultants and financial planners.

Reporting by Rachelle Younglai and Jonathan Spicer; Editing by Phil Berlowitz

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