Industry Warns of Consequences of Dark Pool Reform

SCOTTSDALE, Arizona (Reuters) - Sweeping rule changes meant to shed light on so-called dark pools, where stock-trading is done anonymously, could ultimately hurt the traditional investors that regulators are trying to empower, trading executives warned over the past few days.

The U.S. Securities and Exchange Commission meets in the coming week to consider changes that the industry widely expects will bring some order to the way dark pools communicate, force them to display more quotes, and publicly reveal more data about the amount of trading taking place outside the formal exchanges.

Executives at a conference said political pressure had a hand in pushing new regulations. They argued that although some changes may be needed, a lack of understanding the way orders circulate among the more than 40 U.S. trading venues could lead to poorer prices and executions for mutual funds, pension funds, and individual retail investors.

"Does the public understand that (new rules are) actually going to have real negative consequences to larger orders that are generally made up of a lot of small retail interest?" Shane Swanson, head of transactions at Citigroup Inc's Lava unit, told the Security Traders Association conference.

Dark pools, private venues primarily used to match large trades, have proliferated this decade as institutions sought safe places to buy and sell "blocks" of stock. They now account for an estimated 10 to 15 percent of U.S. equity volumes.

The SEC, having last month proposed a ban on so-called flash orders, has now turned to dark pools as it cracks down on an increasingly opaque and complex marketplace that some say favors the most sophisticated players at the expense of others.

Commissioners, who meet in Washington on Wednesday, are expected to require from dark pools real-time post-trade transparency so that the public has a better idea where trading actually takes place.