‘Dark pools’ are just another conspiracy of bankers against the public

It was at the Mansion House dinner last year that a City gent two seats away announced himself to be the custodian of one of London’s ‘dark pools’. The phrase sounded pleasingly Tolkienian but his first explanation — an electronic exchange in which large share transactions are completed in total privacy — dispelled the charm. My reaction was sharp enough to make the Downing Street spin-doctor between us fiddle nervously with his Twitter feed. If institutional investors can shift blocks of stock on the quiet, without moving public markets, what happens to the normal process of ‘price discovery’ between buyers and sellers? Surely small investors are being ripped off? Sounds like another market abuse to me, I shot along the table. He set out to persuade me otherwise. Encouraged by regulatory changes designed to boost competition between exchanges to the benefit of investors — so I learned — dark pools (some independent, some run by banks, some as offshoots of public stock exchanges) have sprung up in every major market. They account for 15 per cent of US share trading but smaller percentages here and on the continent. Advocates claim their opacity actually makes them safer than public markets, where predators have more information to work with — so long as the pool managers themselves are honest, that is. As Wall Street commentator Larry Tabb puts it, ‘Dark pools are all the rage… Dark is hot, but is it good?’ The first criticism is that dark pools suck liquidity out of public markets. That can make dealing sticky for small investors, and Australia was first to take steps against it; Brussels, eager to regulate as ever, proposes an 8 per cent market-share cap on European pools. But what we now know is that the prime victims of hanky-panky in the dark are not the excluded small fry but the institutional clients (such as pension funds) who are invited in.