Shedding Light on Dark Pools: Recent Regulatory Attempts Toward Transparency and Oversight of Alternative Trading Systems

Abstract

The transfer of ownership of securities has traditionally been accomplished through the use of public exchanges, such as the New York Stock Exchange and NASDAQ, which are subject to stringent statutory and regulatory regulations. Typically, investors purchase and sell equity securities on exchanges based on recent available pricing data. Large purchases or the unloading of shares on the open market may result in a substantial increase or diminution in the price of the shares. Large institutional investors such as mutual funds and the like are wary of making sizeable investments in particular securities because such investments may then cause the securities to fluctuate considerably and the price may be negatively affected. To address this concern, “dark pools of liquidity” – or, simply “dark pools” – arose as a form of an alternative trading system (“ATS”) in an effort to avoid national trading systems. Using dark pools, financial institutions are able to conceal the trades until they are placed. This practice avoids tipping their intentions and avoids a run-up or downturn of the securities prior to the trades. Dark pools now account for more stock trades than the NYSE, although it is worth noting that the NYSE set up a dark pool of its own as a one-year pilot Retail Liquidity Program in 2012. Although the word “dark” in connection with dark pools (as the word “shadow” in shadow banking) connotes seemingly sinister transactions, no such implication should be ascribed to these methodologies of providing liquidity to financial transactions. This articles examines dark pools in light of recent regulatory attempts towards transparency and oversight of ATS.