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Dark Pools

Investors Don’t Like Dark Pools Anymore

Now that investors know more about how dark pools operate, they don’t seem to like them very much.

Trading volume in Barclays’s (BCS) dark pool, a venue where trades are not visible to the broader market, fell 66 percent during the week of June 30 compared with a week earlier, according to a Bloomberg News report. The week before that, volume fell 37 percent. This corresponds with results from a Bloomberg Global Poll of financial professionals last week that found more than half of the people who responded viewed the industry negatively.

This is bad news for dark pool operators, which have seen their business under assault since New York State Attorney General Eric Schneiderman filed a lawsuit in June against Barclays, the operator of the largest dark pool in the U.S., accusing the company of defrauding its customers. Rarely has an industry suffered the kind of devastating public-relations damage that dark pools—and Barclays’s specifically—have recently.

The attorney general’s lawsuit paints an unforgiving picture, alleging that Barclays misled its trading clients about what was going on in its dark pool, all while inviting high-frequency trading firms to swoop in and make money at its clients’ expense. (Barclays says it is cooperating with the investigation and has placed at least one executive on leave.)

As if that weren’t enough, four months ago the Michael Lewis onslaught arrived, with the publication of his latest book, Flash Boys. In it, Lewis declared that the market is rigged against ordinary investors because of high-frequency traders, who make recurrent use of dark pools.

After all that, it’s hard to see how the industry can recover, and the numbers reflect it.

Kolhatkar is a features editor and national correspondent for Bloomberg Businessweek. Follow her on Twitter @Sheelahk.

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