A new report reviews recent regulatory actions against dark pools and offers some lessons for investors. The author of the report, Healthy Markets Association, is “a non-profit 501(c)(6) coalition led by independent experts in market structure analysis and research” with a mission “to promote more robust, stable, and fair markets for investors, not just trader.” The group includes several asset managers as members.
The report claims that “an outdated regulatory framework, a paucity of publicly available order and execution data, and an inability to test dark pools’ claims have provided innumerable opportunities for abuses.” It criticizes regulators for focusing on disclosure of conflicts in recent regulatory actions against dark pools, instead of also attempting to eliminate those conflicts.
The group argues that “[r]ecent and pending regulatory actions against dark pools have irreparably damaged investors’ confidence in their trading venues” and suggests that institutional investors should reexamine their relationships with their trading venues. The report recommends that investors demand better disclosures from dark pools, preferably in the form of standardized public disclosure that offers “high-quality order routing and execution data against which to test brokers’ and venues’ performance.” It also encourages investors to demand that dark pools mitigate and disclose conflicts of interest. Lastly, investors should review and update policies and procedures relating to best execution in order to minimize trading costs and should seek to promote and reward trading venues with business models that align with the investor’s own interests.