SEC to Turn Spotlight on ‘Dark Pools’

By Joanna Chung and Anuj Gangahar in New York

Published: June 19 2009 01:31

The increasingly popular trading venues known as “dark pools’’ are to come under fresh scrutiny from regulators concerned about the emerging risks they pose to the wider markets, the head of the US Securities and Exchange Commission said on Thursday.

Mary Schapiro, SEC chairwoman, has asked her staff to investigate the impact of automated “dark pools”, off-exchange trading venues that do not display quotes to the public. Investors can anonymously trade large blocks of shares on dark pools, leading to concerns about their impact on public prices and markets.

“This lack of transparency has the potential to undermine public confidence in the equity markets, particularly if the volume of trading activity in dark pools increases substantially,’’ Ms Schapiro said in New York last night.

She said the SEC would be taking a “serious look at what regulatory actions may be warranted in order to respond to the potential investor protection and market integrity concerns raised by dark pools.

“For example, the lack of reliable information can prompt speculation and suspicion about the basis for market fluctuations,” she said, adding that the success of dark pools could threaten the price discovery function of publicly quoted share prices.

Her description was the most detailed given to date by a senior US regulator about the potential problems posed by dark pools. Her comments come amid increasing pressure on the agency to stay ahead of potential risks to the markets and investors.

The SEC, which has come under a cascade of criticism for missing the Bernard Madoff fraud, has been taking steps to restore investor confidence and its reputation. Under the regulatory overhaul plan proposed by the Obama administration this week, the agency will be granted additional powers to oversee hedge funds, private equity groups and other entities.

Ms Schapiro said the agency would also focus on standards of conduct that apply to broker-dealers and investment advisers who provide financial services to retail investors.

http://www.ft.com/cms/s/0/e7810094-5...