US stock exchanges NYSE Euronext and Nasdaq told regulators on Tuesday, December 18, that the amount of dark pool trading is increasing and hurting investors.
The private, broker-run dark pools function under separate regulations that rein in the price setting process and make it more difficult to compete.
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Off-exchange trading venues have become much more prominent since the 1990s when new rules allowed automated markets to compete with primary markets.
Those in favor of dark pools claim they increase competition and facilitate trading without harming price structures.
Exchanges say regulators have allowed the dark pools to grow unfettered by needed restraints to ensure fair and equitable participation by all investors.
As a result, larger broker-dealers can more more order flow into their private trading arms to have a first look before they are routed to public markets.
Two markets have evolved from this: the lit, public markets that are accessible and the dark, selectively private non-transparent market.
US markets have become more complex with trading spread across 13 different markets and 50 dark pools.
High-frequency trading, the fees exchanges charge or rebate to users, and the loyalties and obligations of market makers have garnered closer scrutiny since the flash crash of May 6, 2010.
Exchanges and brokers don’t have the same oversight responsibilities because of their regulatory status. Public exchanges receive market data revenue for the same information about transactions and quotations.
Despite this, the percentages of transactions in equities that are canceled after they have been input have increased mistrust and unnecessary complexity of the markets.
The exchanges are suffering not only from lower volumes but also from a smaller piece
of those volumes.
Exchanges complain there is too much dark trading because they are trying to diversify away from what is called a double whammy, where technology and market-structure developments have focused on speed and, simultaneously, increased the complexity of the markets.