'Dark Pools' In Equity Trading: Significance and Recent Developments [August 27, 2014]   [open pdf - 51KB]

"'Dark pools' are relatively recent and controversial electronic stock trading alternatives to traditional exchanges, such as the New York Stock Exchange (NYSE), and now account for about 15% of overall trading volume. A dark pool is a type of 'alternative trading system' (ATS), a broker-dealer who matches the stock trading orders of multiple buyers and sellers outside of exchanges. Orders sent to dark pools to buy or sell certain stocks are not publicly displayed. When they emerged in the late 1990s, that opacity attracted the pools' initial clients, institutional investors (such as pension and mutual funds), who used it to conceal large trading interests, thus helping to reduce the risk of the market moving against their trades. Quote concealment is a legacy of a regulation adopted by the Securities and Exchange Commission (SEC) in 1998, Regulation ATS, which allowed ATSs with less than an average 5% share of the trading volume to not publicly display their quotes. This contrasts with the 'lit' venues, Nasdaq and the exchanges, which do. Under Regulation ATS, dark pools are required to register either as exchanges with the SEC or as broker-dealers with the Financial Industry Regulatory Authority (FINRA). FINRA, which the SEC oversees, is the frontline regulator of SEC-registered broker-dealers. Dark pools are subject to the same rules that govern trading either on an exchange or by a broker-dealer."

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CRS Insight, IN101340
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