Dark pools and high-frequency traders, two elements of the electronic U.S. stock market whose rise has been decried in books and Congress, are finding little support among financial professionals.
At least half the respondents in the Bloomberg Global Poll professed a negative view of the anonymous equity markets and proprietary firms that buy and sell stocks in millionths of a second. The findings come four months after “Flash Boys” author Michael Lewis said markets are rigged and four weeks after the New York attorney general accused a dark pool owned by Barclays Plc of lying to customers.
“I don’t like secret societies,” said Peter Nielsen, a senior investment analyst and poll respondent at Saturna Capital Corp. in Bellingham, Washington, which oversees $4 billion. “I don’t like secret trading; it just runs against my personal disposition,” he added. “I’m a big believer in transparency -- huge believer in transparency. Even the word ‘dark pool’ freaks me out.”
Growing unease among investors, traders and analysts who are Bloomberg subscribers may signal challenges for market defenders, who say electronic trading is misunderstood and a target of demagoguery. The U.S. Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Bureau of Investigation and New York attorney general are investigating the industry.
High-frequency trading’s impact on financial markets is viewed negatively by 50 percent of those surveyed, compared with 27 percent who see it positively. Dark pools, private venues often owned by brokers that don’t publish bid and ask prices, received negative marks from 53 percent of respondents, versus 23 percent positive.
Broker-run platforms where orders are cloaked proliferated over the last decade as mutual funds and other large investors sought ways to trade blocks of shares without giving away their intentions. Dozens of the venues exist in the U.S. today, competing for orders with 11 exchanges in a fragmented electronic network.
“It’s not an open market,” said Sriram Srinivasan, chief executive officer of Wall Street Investment Management in Chantilly, Virginia, and a poll respondent. “People that do not have access to the dark pools are going to lose. And it is nine out of 10 investors that are losing.”
The poll of 562 Bloomberg users was conducted July 15 and 16 by Selzer & Co., a Des Moines, Iowa-based firm, on topics ranging from monetary policy to the direction of oil prices. It has a margin of error of plus or minus 4.1 percentage points.
Private trading is as popular as ever with institutional users. The share of transactions taking place in off-exchange venues such as dark pools was about 38 percent in June and topped 42 percent one day in that month, the highest since 2010, according to data compiled by Bloomberg.
Mary Jo White, the SEC chairman, said on June 5 when announcing initiatives that would increase supervision of electronic traders and dark pools that the stock market is neither broken nor rigged. Individuals are “doing better” now than they did when trading was manual, she said at a conference sponsored by Sandler O’Neill & Partners LP.
“Investors are going to send their orders where they get the best price, in many cases irrespective of venue,” said Kevin McPartland, head of market structure for research firm Greenwich Associates in Stamford, Connecticut. “For an asset manager, who has a fiduciary responsibility to prove that they’re going out seeking best price, if you ignore certain liquidity sources, you know in many cases you might be missing a good execution.”
New York Attorney General Eric Schneiderman’s complaint against Barclays said the dark-pool operator lied to clients about the prevalence and types of high-frequency traders at its LX venue. The London-based bank takes the allegations seriously and is cooperating with the investigation, according to spokesman Mark Lane.
High-frequency trading has increased in the last 10 years as regulators sought to break the grip of dominant exchanges, and electronic traders supplanted the human market makers who once oversaw transactions. Their tactics, such as paying to locate computers within feet of exchange servers and buying access to faster data, breed distrust, said John Stoltzfus, New York-based chief market strategist at Oppenheimer & Co.
“Any time that you elevate one class of access to the markets over the general class of access to the markets, it reduces the fairness of the game,” Stoltzfus, a poll respondent, said in a phone interview. “Anything that would create doubt about the fairness in those, whether it is real or perceived, we think is problematic.”
Customers from Asia took a brighter view on high-frequency trading than those in the U.S. or Europe, with 41 percent saying they thought the practice had a positive effect on markets and 28 percent taking a negative view. Twenty-two percent of respondents in the U.S. said there was a positive effect, while 57 percent saw a negative effect. Among European customers, the figures were 26 percent and 53 percent, respectively.
Concerns that lightning-fast trading gives some investors an unfair advantage were reignited by the March 31 publication of Lewis’s best-selling book, which said high-frequency traders regularly front-run orders by individuals and mutual funds. Earlier that month, Bloomberg News reported that Schneiderman’s office had begun a probe into the relationship between venues and high-frequency firms.