Dark Pools Face More Enforcement Actions, SEC Official Says

(Bloomberg) — The U.S. Securities and Exchange Commission plans to bring more enforcement cases against dark pools and private trading venues whose opaque rules and incentives may harm investors, one of the agencys senior attorneys said.

TheSECis investigating special order types, how brokers route trades and payments they receive for sending customer orders to wholesale market makers, Daniel M. Hawke, chief of the SECs market abuse unit, said Tuesday at a conference in Washington. Regulators have said those arrangements create conflicts of interest for brokers.

SECChair Mary Jo White in June announced a plan to reshape U.S. stock trading regulation, including initiatives to boost oversight of high-frequency traders and the transparency of dark pools. The following day, Liquidnet Holdings Inc., one of the biggest independent dark pool operators, agreed to pay a $2 million fine for not living up to client confidentiality standards.

New York Attorney General Eric Schneiderman has also stepped up scrutiny of the trading practices. In a June lawsuit, Schneiderman claimed Barclays Plc misled investors about the presence of predatory high-frequency traders in its dark pool. Schneiderman said the bank bilked its own customers in order to feed its dark pool.

Retail brokers that receive payments to send their customer orders to particular wholesale market makers have been under the microscope since senators led by Michigan Democrat Carl Levin examined the deals at a hearing in June. TD Ameritrade Holding Corp., one of the biggest online brokers, told Levins committee that it earned $236 million in 2013 for internalizing orders, or sending them to wholesalers that filled them.

White, in her June remarks, ordered exchanges to conduct a comprehensive review of their complex order types and determine whether they operate as they were intended.

TheSECalso plans to shine more light on brokers stock- routing decisions through its rulemaking, White said. Choices about where to send a customers order among dozens of exchanges and private venues can be influenced by trading fees and rebates set by exchanges. Many institutional investors lack a uniform report to compare the quality of order execution across brokers.