See Ya Later, Regulators
The Dark Pool industry is growing so fast regulators can’t keep up.
Liquidnet Holdings Inc., an alternative trading system used by institutions, has just executed a block trade of a million shares or more. Unlike the bulk of trading in stocks, this trade was made anonymously and was executed outside of the market where retail investors and institutions meet. And unlike a trade on the floor of the New York Stock Exchange, no one will ever know who put a million shares up for sale and who just bought them. Liquidnet is one of dozens of new private trading networks that – in just two years’ time — have ushered in a sea change that challenges Wall Street’s top institutions while posing vexing questions for regulators and investors alike.
These so-called alternative trading systems are propagating rapidly, are often labeled “dark pools” because of their nebulous and murky nature. Estimated to handle about 1 out 10 shares traded each day in the U.S., dark pools are meeting a need by institutions to grab or dump stocks quietly — and anonymously. Like Liquidnet, many of them sport imaginative brand names in a nod to science fiction, such as Sigma X, VortEx and Block Alert. In a matter of months more than three dozen dark pools have taken shape, creating a new and wild frontier that is largely unregulated. And the industry is growing so fast regulators can’t keep up.A combination of technology and profit potential are driving a boom of startups. It’s estimated that there were 38 dark pools up and running as of May 1. Among them are three major categories of services that represent varying shades of anonymity.
- Some are true dark pools, where buyers and sellers are matched anonymously. Players in this segment include Liquidity Ping, VortEx, PositNow, Continuous Cross and Pin.
- Call markets such as Opening Cross and Posit Match execute trades at a price — usually set by the public market — anonymously.
- Negotiation-based pools, run by the likes of BIDS and Liquidnet, which match up buyers and sellers who then bargain on a deal price.
