NEW YORK – Dark-pool operators are firing back at the chief executive of Nasdaq OMX Group Inc., arguing that banning their platforms would make buying and selling stocks more expensive for all investors.
This week Nasdaq CEO Bob Greifeld called for regulators to end all forms of "dark liquidity," ratcheting up the dialogue around the role of alternative- trading systems and off-exchange liquidity in U.S. cash markets.
Dark pools, a fast-growing form of alternative trading, are electronic-trading venues where money managers trade large blocks of shares anonymously.
Several dark-pool executives told Dow Jones Newswires that Mr. Greifeld's far-reaching proposal would have calamitous effects for retail and institutional traders.
"Undisplayed liquidity adds to execution quality," said Bob Gasser, chief executive of Investment Technology Group Inc., which is credited with creating the first of the modern-day dark pools roughly 20 years ago. "You can come up with all kinds of anecdotes, but the simple fact is, on behalf of all investors, dark liquidity adds to execution."
Other alternative-trading system executives called Mr. Greifeld's stance on the issue opportunistic given lawmakers' recent focus on related issues, and suggested that Nasdaq OMX is acting defensively after losing market share to non-displayed trading venues.
Several dark pool officials also noted that both Nasdaq OMX and NYSE Euronext, which has also been losing market share, maintain non-displayed liquidity pools.
As dark pools have grown -- accounting for more than 7% of all trades in June, according to Rosenblatt Securities -- the SEC has made it clear it is evaluating these alternative trading systems, indicating more regulation is likely.
In interviews with nearly a dozen dark-pool executives, none objected to the SEC's initiative. Dark-pool administrators are willing to provide more transparency and standardize volume reporting, with most even demanding it.
But Mr. Greifeld's letter this week went a step further, calling for the elimination of "market structure policies that do not contribute to public price formation and market transparency." The Nasdaq OMX chief tied dark pools to the issue of flash order types, a trading practice in which stock trades, after being checked against an exchange's order book, are sent to a select group of participants before being routed to other exchanges for filling.
Critics allege this gives such participants, sometimes including those that use dark pools, an unfair information advantage. Sen. Charles Schumer (D., N.Y.), last week told the SEC in a letter he will move to limit flash orders if the commission doesn't.
Nasdaq OMX adopted the practice with a nod toward competitive pressure from rivals BATS Exchange and Direct Edge, which have their own versions of flash orders. However, BATS and Nasdaq OMX have both voiced support for banning the practice in recent days.
The issue for dark pools is more complex. Unlike flash orders, retail investors use dark pools and benefit from them, proponents say.
Mutual funds, for example, receive cash from individuals, endowments, pensions and others, and then go to the market with one large pool of money. If they revealed a massive order to the displayed market, it would drive prices higher and make it more costly to invest.
Also, day traders with accounts through market providers such as E*Trade Financial Corp. or TD Ameritrade Holding Corp. go through brokers to find the national best bid and offer, or NBBO, which is often in dark pools. Operators of the platforms said Mr. Greifeld's comments overlook factors such as these.
"I understand when there's a duopoly, you want to maintain that, because it's a good business model," said Seth Merrin, founder and CEO of Liquidnet, among the largest independent dark pools. "But it's really detrimental to all the people who invest in pension funds or mutual funds, and people who manage institutional order flow."
This week Nasdaq CEO Bob Greifeld called for regulators to end all forms of "dark liquidity," ratcheting up the dialogue around the role of alternative- trading systems and off-exchange liquidity in U.S. cash markets.
Dark pools, a fast-growing form of alternative trading, are electronic-trading venues where money managers trade large blocks of shares anonymously.
Several dark-pool executives told Dow Jones Newswires that Mr. Greifeld's far-reaching proposal would have calamitous effects for retail and institutional traders.
"Undisplayed liquidity adds to execution quality," said Bob Gasser, chief executive of Investment Technology Group Inc., which is credited with creating the first of the modern-day dark pools roughly 20 years ago. "You can come up with all kinds of anecdotes, but the simple fact is, on behalf of all investors, dark liquidity adds to execution."
Other alternative-trading system executives called Mr. Greifeld's stance on the issue opportunistic given lawmakers' recent focus on related issues, and suggested that Nasdaq OMX is acting defensively after losing market share to non-displayed trading venues.
Several dark pool officials also noted that both Nasdaq OMX and NYSE Euronext, which has also been losing market share, maintain non-displayed liquidity pools.
As dark pools have grown -- accounting for more than 7% of all trades in June, according to Rosenblatt Securities -- the SEC has made it clear it is evaluating these alternative trading systems, indicating more regulation is likely.
In interviews with nearly a dozen dark-pool executives, none objected to the SEC's initiative. Dark-pool administrators are willing to provide more transparency and standardize volume reporting, with most even demanding it.
But Mr. Greifeld's letter this week went a step further, calling for the elimination of "market structure policies that do not contribute to public price formation and market transparency." The Nasdaq OMX chief tied dark pools to the issue of flash order types, a trading practice in which stock trades, after being checked against an exchange's order book, are sent to a select group of participants before being routed to other exchanges for filling.
Critics allege this gives such participants, sometimes including those that use dark pools, an unfair information advantage. Sen. Charles Schumer (D., N.Y.), last week told the SEC in a letter he will move to limit flash orders if the commission doesn't.
Nasdaq OMX adopted the practice with a nod toward competitive pressure from rivals BATS Exchange and Direct Edge, which have their own versions of flash orders. However, BATS and Nasdaq OMX have both voiced support for banning the practice in recent days.
The issue for dark pools is more complex. Unlike flash orders, retail investors use dark pools and benefit from them, proponents say.
Mutual funds, for example, receive cash from individuals, endowments, pensions and others, and then go to the market with one large pool of money. If they revealed a massive order to the displayed market, it would drive prices higher and make it more costly to invest.
Also, day traders with accounts through market providers such as E*Trade Financial Corp. or TD Ameritrade Holding Corp. go through brokers to find the national best bid and offer, or NBBO, which is often in dark pools. Operators of the platforms said Mr. Greifeld's comments overlook factors such as these.
"I understand when there's a duopoly, you want to maintain that, because it's a good business model," said Seth Merrin, founder and CEO of Liquidnet, among the largest independent dark pools. "But it's really detrimental to all the people who invest in pension funds or mutual funds, and people who manage institutional order flow."
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