NEW YORK, Oct 10 (Reuters) - ConvergEx Group LLC is revamping its two alternative trading systems, or “dark pools,” due in part to expectations of tighter industry regulations, Eric Noll, chief executive of the brokerage and trading services provider, said on Friday.
Dark pools - private, broker-run venues where trading information is kept secret until after trades are completed - have faced intense scrutiny in recent months. Several regulators are probing how the venues operate, and New York’s attorney general has filed a lawsuit against Barclays accusing the bank of misleading investors about its dark pool. Barclays is fighting the lawsuit.
New rules for the industry are likely, Noll said.
“I think this is a train that is leaving the station, and we want to be out ahead of it,” the former Nasdaq executive said at a Society of American Business Editors and Writers conference.
ConvergEx has two dark pools, called Millennium and Vortex. Noll said ConvergEx will relaunch Millennium by the end of October as a marketplace where orders can only be executed at the mid-point of the national best bid and offer available on public stock exchanges, guaranteeing meaningful price improvement.
The firm will relaunch Vortex in 2015 as a venue that will give different pricing levels to different market participants based on whom they want to trade with, Noll said on the sidelines of the conference.
Some firms use complex algorithms to quickly flip shares for profit. That can cause stock prices to move and the buyer or seller may not get the best price. Others take a longer-term investing approach. In Vortex, participants will be able to choose the types of counterparties they want to interact with, and will pay less to trade with the more aggressive firms and more to trade with other investors.
Dark pools began as places for institutional investors, like mutual funds, to buy and sell large amounts of stock without tipping their hand to the wider market, which could cause the price to move against them.
There are now more than 40 dark pools. While some still cater to institutional clients, the average size of transactions overall is not even 200 shares, which is less than on exchanges.
Around 15 percent of all trading happens in dark pools, and because those venues do not reveal trading intentions before a trade had taken place, they play little role in helping to find the fair value of the stocks that trade on them.
Canada and Australia have taken steps to curb off-exchange trading by requiring, for instance, that such trades be of a minimum size or have a significantly better price than can be found on an exchange. Europe and Hong Kong are also considering new rules.
For the week of Sept. 15, Millennium was the 22nd largest U.S. dark pool, with more than 29 million shares traded, while Vortex was 28th, with nearly 18 million, according to the latest data from the Financial Industry Regulatory Authority. (Reporting by John McCrank; Editing by Bernard Orr)