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Very Dark Pools: SEC Set to Rule on Shadow Exchanges

The SEC is set to make a ruling on dark pools tomorrow.

The SEC wants more transparency on dark pools, which are private trading venues designed to match large blocks of stock. The agency will likely try to limit the volume of trading that goes on.

Here's the concern: Trading in dark pools occurs away from the public markets, and as more and more order flow goes there (estimates are that 10 to 20 percent of equity volume is executed in dark pools) there's concern at the SEC that the markets are fragmenting, and that information might be leaked only to select participants in the dark pools.

Traders are using dark pools to (legitimately) conceal their identity and to prevent others from gleaning their trading strategies.

  • Industry Warns Regulators of Consequences of Dark Pool Reform

Right now, dark pools are limited to trading a maximum of 5 percent of any company's shares per day. The SEC may lower that limit to 0.25 percent.

Regardless, it's likely there will be more regulation. Stocks exchanges like the NYSE and NASDAQ have been arguing for years that dark pools have created an uneven playing field because the exchanges are heavily regulated, while dark pools are lightly regulated, despite both providing similar services.

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