By Bradley Hope and Scott Patterson
After years of operating in the shadows, dark pools are coming
into the light.
Goldman Sachs Group Inc. and Credit Suisse Group AG, two of the
biggest operators of opaque trading venues known as dark pools,
which execute trades away from stock exchanges, on Monday published
documents explaining in detail how their venues work.
The disclosures came on the day that the Financial Industry
Regulatory Authority issued for the first time data on volume of
shares traded on dark pools.
Goldman Sachs has been weighing the move for more than two
months. The bank has grown concerned that increases in complexity
and instability in the stock market are harming investor confidence
and hopes to address the issue by being more transparent about its
own trading operations, said Brian Levine, co-head of Goldman's
Global Equities Trading and Execution Services.
Goldman executives have raised the possibility of closing its
dark pool, known as Sigma X, in conversations with market
participants in recent months, The Wall Street Journal reported in
April.
Dark pools, private, lightly regulated trading venues where
buyers and sellers can swap shares with greater anonymity than on
stock exchanges, have come under criticism recently as part of a
wider complaint that the U.S. stock market has become too complex.
Together with so-called internalizers--firms that execute trades on
behalf of retail brokerages--they account for nearly 40% of all
stock trading, according to Tabb Group.
Critics say that off-exchange trading hurts the ability of the
market to accurately price securities, since buy and sell orders
aren't published. Some have also questioned the role played by
high-frequency firms, superfast traders that use turbocharged
computers and telecommunications networks to buy and sell stocks,
in dark pools.
Dark-pool proponents say their venues offer big institutional
investors the opportunity to buy or sell stocks without moving
prices as much as they would by displaying their order on an
exchange.
"If you go to the market with a huge order, the price is going
to move away from you very quickly," said Brian Carr, who heads up
two dark pools operated by ConvergEx Group LLC as the firm's
managing director and co-head of sell-side services. "With a dark
pool, you have faster executions sometimes and you have a better
chance at bringing together natural buyers and sellers."
The new transparency efforts may help to eradicate the
"mysterious and elusive" reputation of dark pools, he said, adding
he was partially responsible for the negative-sounding phrase "dark
pool." He said he and some colleagues came up with the phrase
around 2001, when they were looking for a way to describe
alternative trading systems that didn't display bids and asks.
Broker-dealers dominate the dark-pool business. Finra's data
show Credit Suisse's CrossFinder, Barclays PLC's LX and UBS AG's
PIN ATS as having executed the most shares of tier 1 stocks during
the week of May 12. The data will be published weekly.
On Monday, Credit Suisse and Goldman each released previously
undisclosed documents to the public that give details about how
their dark pools operate and what order types it offers.
The moves follow the release of similar documents by IEX Group
Inc., a dark-pool operator that says it screens out abusive
high-speed trading tactics. IEX published its Form ATS when it
opened for trading in October.
Credit Suisse described CrossFinder, its dark pool, as "an
anonymous matching engine available to Credit Suisse clients,
internal trading desks and Credit Suisse affiliates." It employs
"anti-gaming measures" to prevent high-speed traders from taking
advantage of slower investors, the document said. In a separate
document, Credit Suisse said it allows high-frequency traders in
its dark pool but has "developed tools, technology and
processes...to mitigate risks associated with certain types of
market behavior."
Liquidnet Holdings Inc., a dark pool that specializes in helping
institutions trade large blocks of stock, also published Form ATSs
for its two venues on Monday.
"These transparency efforts show that not all dark pools operate
the same way," said Adam Sussman, Liquidnet's head of market
structure and liquidity partnerships. "Not all dark pools cater to
the same investors and strategies."
Write to Bradley Hope at bradley.hope@wsj.com and Scott
Patterson at scott.patterson@wsj.com
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