SEC Speech Foreshadows ‘Dark Pool’ Investigations

June 10th, 2014

Last week, Mary Jo White, Chair of the Securities and Exchange Commission (SEC), introduced plans to reform the agency’s regulation of equity market structures before Sandler O’Neill & Partners’ Global Exchange and Brokerage Conference in New York City.  Among the primary targets of White’s proposed reformation were ‘dark pools.’  High frequency trading firms, exchanges and brokers were also singled out for further investigation.

 

Dark pool trading has increased from 25 percent to 35 percent over the past five years, and has received considerable attention after being covered in Michael Lewis’s book, Flash Boys.  In her speech, White said that dark trading venues “lack transparency,” and “only provide limited information about how they operate.”  White also said that the SEC needed to “examine whether dark trading volume is approaching a level that risks seriously undermining the quality of price discovery provided by lit venues.”

 

Following in line with White’s statements, the Wall Street Journal reported yesterday that the SEC plans to begin examining the largest of these private trading platforms.  According to statements from the media and regulators, it appears that the dark pools operated by Credit Suisse, Barclays and UBS, the three largest venues in the United States (US), representing a combined total of $800 million in commissions last year, will be the focus of the SEC’s examinations.

 

Other entities, including high frequency trading firms are already experiencing heightened scrutiny. In March, New York Attorney General Eric Schneiderman announced new efforts to investigate high frequency trading firms and dark pools. The Senate’s Permanent Subcommittee on Investigations announced plans to conduct a hearing to evaluate conflicts of interest related to high frequency trading last week.  On Friday, June 6, 2014, the SEC brought charges against Liquidnet, a dark pool operator, for the improper use of confidential subscribers’ information.  Even though these investigations are just in their initial stages, it is clear that participants in dark trading activities and/or linked to high frequency trading will be closely examined in the upcoming months.

 

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