Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.
There are two ways to look at the $154 million that Barclays and Credit Suisse Group paid to settle allegations that they misled clients regarding how their dark pools operated.
The first is to look at that figure and conclude it's peanuts compared with the big bucks that large banks have spent on mortgage settlements, where checks with nine zeroes are common. But the other way is to compare the figure with how much the banks are making from dark pools, and the question for many may be: are they even worth the headache?
Banks do not typically break out the amount of revenue that these alternative trading systems generate, instead lumping it into a catchall line for their equities businesses.
In 2014, Larry Tabb of research firm Tabb Group estimated that trades matched on the top three dark pools were associated with about $800 million worth of commissions. However, since the brokers who own the dark pools probably would have received most of those fees anyway, the value of the trading venues themselves stems from market maker fees and costs avoided by not having to pay public exchanges or other alternative marketplaces. By that math, he concluded, the combined yearly revenue at the top three dark pools was worth as little as $60 million and at most $90 million. Those figures probably haven't changed drastically.
Dark pools began to surge in popularity about a decade ago as stock markets became more computerized and institutional investors sought ways to move big blocks of stocks in the "dark" -- in other words without alerting the rest of the market. As a Bloomberg News article in 2006 described it: "Because most bids and offers are shown on the NYSE and Nasdaq, trading on either exchange is akin to playing poker with an open hand."
So banks began internalizing trades on their own systems, reducing the fees they paid to exchanges and drumming up business for their brokerages who ran the dark pools.
For a long time, they operated without much regulatory scrutiny. But that changed quickly as mistrust of the modern electronic market grew in the post-"Flash Boys" era. Last year, nonbank dark-pool operator Investment Technology Group agreed to pay $20.3 million after its proprietary trading desk used knowledge of customers’ requests to trade for its own benefit, among other infractions, and UBS paid $14.4 million for lack of disclosures about how its dark pool worked.
In the settlements announced on Sunday, Barclays agreed to pay $70 million to the Securities and Exchange Commission and New York Attorney General Eric Schneiderman for misrepresenting how it monitored high-frequency traders. Credit Suisse, which was accused by Schneiderman of routing orders to its own dark pool but telling clients it didn't prioritize venues, will pay $84.3 million.
Additional actions are likely against other banks, Schneiderman and SEC enforcement director Andrew Ceresney said on Monday. Because of the hundreds of pages of rules that govern modern stock trading, it's easy to imagine a dark pool being in violation of one of them without even trying.
The marketing pitch may have once been something along the lines of "Use our brokerage, we have a dark pool and can keep you safe from the computerized predators." But with all the mud being slung at dark pools these days, it makes you wonder if a better pitch might be: "You can trust our brokerage, we don't have a dark pool."
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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