In early June, the Financial Industry Regulatory Authority (Finra) quietly began boosting transparency in the murky waters of dark pools by posting alternative trading system (ATS) transparency data on its Web site. The data gave the industry a first comprehensive look at the numbers of shares traded in dark pools, the number of total trades, and maybe even a first look at the total number of dark pools in existence.
Just weeks after that first light of Finra data appeared, the issue of dark pool transparency exploded onto headlines when New York Attorney General Eric Schneiderman filed suit against Barclays LX, one of the leaders in the dark pool charts, for misleading clients to the makeup of their dark pools and attempting to cover up the amount of liquidity coming from high-frequency traders.
Barclays is fighting the lawsuit tooth and nail, and its unclear whether the case will lead to more lawsuits but the impact is being felt in the industry. Whether pressured by regulators or prosecutors, there are signs that this unlit corner of the industry is moving toward increased transparency.
It adds to a more constrained environment. Marketing has to be reined in, said David B. Weiss, senior analyst for Aite Group. When a dark pool starts, it may have a certain kind of trade flow, and over time flow will change. You cant take trade flow for granted. But when trade flow changes, marketing has to change.
Tabb Group Analyst Valerie Bogard, who managed Tabbs Equity LiquidityMatrix on dark pool data analysis, said that some dark pools already beginning to boost transparency on their own initiative.
In terms of transparency we have already begun to see several pools move in that direction voluntarily. Whether its hosting form ATS on their site or listing detailed FAQs and fact sheets about their pools, thats the new direction theyre taking, she told Traders.
Meanwhile opinions are divided on whether the fragmented world of many dark pools will continue to expand or start to contract. Bogard notes that KCG recently closed its GetMatched ATS, leaving it with two remaining dark pool-type platforms, Knight Link and Knight Match, and that Wells Fargo also recently closed its Liquidity Crosser dark pool due to lack of demand.
There are 41 ATSs and we are expecting that number to shrink a bit further, she said.
But Weiss sees dark pools as business that sustains engagements with clients and often lead to other business.
I think the market will get less concentrated over time, not more concentrated, countered Weiss. Dark pools might not be an instigator of that fragmentation but they are recognition of that fragmentation. Its hard to put Humpty Dumpty back together again.
