Investor Alert: Just What Are Dark Pools?
Occasionally, we are taken with exploring the meaning of financial terms. We have to admit that this term intrigued us on Halloween weekend as no other term has for quite a while. Just savor the fragment, "investors operating with the dark pool." Perhaps now we should investigate IOIs.
Fact Sheet
Strengthening the Regulation of Dark Pools
SEC Open Meeting
Overview:
The Securities and Exchange Commission voted to issue proposals designed to shed greater light on “dark pools” of liquidity. Dark pools of liquidity are a type of alternative trading system (ATS) that does not display quotations to the public.
The number of active dark pools transacting in stocks that trade on major U.S. stock markets has increased from approximately 10 in 2002 to approximately 29 in 2009. For the second quarter of 2009, the combined trading volume of dark pools was approximately 7.2% of the total share volume in these stocks, with no individual dark pool executing more than 1.3%.
Given the growth of dark pools, this lack of transparency could create a two-tiered market that deprives the public of information about stock prices and liquidity.
To make trading through dark pools more transparent, the proposals would:
* Require generally that information about an investor’s interest in buying or selling a stock be made publicly available, instead of just to a select group operating with a dark pool.
* Require that dark pools publicly identify that it was their pool that executed the trade.
The dark pool proposals are intended to enhance transparency and promote fairer [as opposed to darker, as in dark pools?], more efficient markets for US-listed stocks.
How Do Dark Pools Operate?When investors place an order to buy or sell on an exchange, the exchange typically makes that order available for the public to view. With some dark pools, however, investors are able to signal that they have an interest in either buying or selling a security. But that so-called indication of interest (IOI) is communicated only to a subset of market participants.
That means that investors operating with the dark pool have access to information about a potential trade that other investors using public quotations do not. As a result, dark pool participants are able to have their orders filled, while those on publicly displayed markets go unfilled, even though dark pools use the information from publicly displayed markets to price the dark pool transactions. When dark pools share information about their trading interest with other dark pools, they can function like private networks that exclude the public investor.
Read the rest of the Dark Pool Fact Sheet at the SEC site
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