What’s worse than high-speed traders who “front-run” normal investors at stock exchanges? Stock traders who cut their deals off the exchanges altogether.
That, at least, is the concern some experts are raising about so-called “dark pools” for off-exchange stock trades, even as high-frequency trading faces increased media and regulatory scrutiny.
Brokers and their clients can benefit from dark pools as they sidestep exchange trading fees.
But dark pools have grown so much that publicly quoted prices for stocks on exchanges may no longer properly reflect where the market is, experts say.
This is an issue that could cost investors far more money than any shenanigans related to high-frequency trading, in which super-computers with high-speed network connections are used to siphon away profits from ordinary investors.
Around 40 percent of all US stock trades, including almost all orders from “mom and pop” investors, now happen “off exchange,” up from around 16 percent six years ago, according to Reuters.
This trend is “a real concern,” John Ramsay, former head of the Securities and Exchange Commission’s Trading and Markets division, told the news service.
“We have academic data now that suggests that, yes, in fact there is a point beyond which the level of dark trading for particular securities can really erode market quality,” Ramsay said.