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Dark Pools

Photographer: Biwa Studio/Getty Images
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Dark pools have a scary name, and to critics they’re scary places: private stock markets housed inside some of Wall Street’s biggest banks. Created to let big investors swap large blocks of shares in secret, they’ve expanded to become a significant part of daily stock trading. More shares now change hands in dark pools than on the New York Stock Exchange. Dark pools have helped bring down trading costs. But whether markets as a whole suffer when too much trading information is private is something regulators around the world are trying to figure out — along with whether some dark pools have been taking advantage of the darkness to favor some customers over others.

Rules to limit dark pool trading have been put in place by Canada and Australia, and the European Union is phasing in similar measures as part of a comprehensive set of rule changes known as MiFID II. As a result, firms are introducing alternatives to keep stock trades under the radar for European traders. The U.S. Securities and Exchange Commission is developing new regulations to increase disclosures about dark pool trades. Last December, the agency and New York Attorney General Eric Schneiderman reached a settlement with Deutsche Bank AG in which it admitted to misleading customers about how its dark pool worked and agreed to pay $37 million. Earlier that year, Barclays and Credit Suisse agreed to pay $154.3 million to the same regulators for alleged wrongdoing in their own pools. The settlements were the latest in a string of cases that gave ammunition to critics who said some dark pools were designed in a way that let high-frequency traders place bets knowing which way the market was about to go. That charge had been given prominence in Michael Lewis’s 2014 book, “Flash Boys.” The U.S. stock market has fragmented into 12 public exchanges and roughly 45 alternative trading systems, most of them dark pools.