Dark pools are “Wild West” of trading

CowboyMore light needs to be cast on dark pools, alternative trading venues used by institutions and other investors, following the investigation into Barclays, says an assistant professor of finance from the Warwick Business School.

Dr Chen Yao says data on dark pools is limited and more needs to be made available for researchers to examine them.

"Certainly some light needs shedding on dark pools as they are something of the ‘Wild West’ of trading  who knows what goes on in them,” says Yao.

The New York attorney general recently filed a lawsuit against Barclays alleging that the bank had falsified documents and misrepresented benefits it was offering to big institutional clients.

In part of the lawsuit it is claimed that Barclays told investors it would use a stock exchange or dark pool to offer best execution at any one time, when in reality it handled most of the trades internally.

“When an investor sends his order to the broker, it is the obligation of the broker to route the order to the trading platform with the best execution price,” says Yao. “However, some of the brokers prefer to internalise the order flow and execute orders in their own pools if the execution price is at least as good as what can be achieved in other platforms. Brokerage firms like Barclays like internalisation in their own dark pools because they can earn the price difference between what they buy and what they sell."

Dark pools have been linked with high-frequency traders. Yao notes there are concerns that these traders are taking advantage of opaque dark pools to front run other customers.

The lawsuit claims Barclays allowed predatory traders to access its dark pool, despite claiming to customers that it took measures against them.

A Barclays spokesman, said: “We take these allegations very seriously. Barclays has been cooperating with the New York Attorney General and the SEC and has been examining this matter internally. The integrity of the markets is a top priority of Barclays.”

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