SEC spotlight puts "dark pool" venues on defensive

By Jonathan Spicer

NEW YORK (Reuters) - The operators of anonymous stock trading venues called 'dark pools' defended their existence on Friday, but conceded they could be more transparent after the U.S. Securities and Exchange Commission warned they posed "emerging risks."

The venues allow stock traders to hide their intentions and have come under increased scrutiny as they have grown, and as the United States scrambles to rewrite market rules and bulk up oversight.

SEC Chairman Mary Schapiro said on Thursday she was worried about the effect of dark pools on price discovery, particularly their use of pre-trade messages that tip off certain market participants to upcoming orders, adding the agency is considering taking action.

Dark pools have proliferated as markets have gone electronic. Some operators, which include big banks, told Reuters dark pools could adopt better trade reporting standards, but warned against new rules that would wipe out the benefits of having multiple trading venues.

"If they do something that makes the dark pool light and eliminates the reasons for institutions to trade on our vehicles, that would be a disaster for a hundred million people out there," said Seth Merrin, chief executive of electronic marketplace Liquidnet, a dark pool used by buy-siders.

"I'm definitely afraid of knee-jerk reactions," Merrin said in an interview, adding dark pools may need to improve the way they report trading volumes. "But who knows what could happen in this environment."

The Obama administration unveiled sweeping financial reform plans this week promoting market transparency and regulatory oversight, following the worst financial crisis since the Great Depression.

The next day, Schapiro told a New York Financial Writers Association dinner the SEC, "will be taking a serious look at what regulatory actions may be warranted in order to respond to the potential investor protection and market integrity concerns raised by dark pools."