An article in Bloomberg Business reports that Investment Technology Group Inc. is getting a $20 million fine for a dark-pool violation.
Investment Technology Group Inc.’s stock fell after the company said its dark pool faces a record $20.3 million penalty for running afoul of U.S. regulations.
ITG dropped 23 percent to $18.38 at 9:40 a.m. New York time Thursday and earlier plunged 24 percent, the biggest intraday decline since April 2009.
A market-making unit run by a subsidiary in 2010 and 2011 traded using information not available to other customers of ITG’s private stock-trading system, the company said Wednesday. That is against SEC rules. ITG said it’s in talks with the regulator to settle the case. Judy Burns, an SEC spokeswoman, declined to comment on ITG’s disclosure.
The infraction here was treating traders in the dark pool differently than other traders by favoring them with insider information. But what is dark pool stock trading?
Dark Pool Stock Trading
A year ago we warned readers to beware of dark pools.
A dark pool is a trading network which allows traders to buy or sell large orders without transparency. An issue for someone who owns huge amounts of stock is that when they want to sell their sell orders are typically large enough that they drive the market price down. These folks like dark pools because no one else sees their order. However, this fragments the market. Imagine that you are looking for a house and want to know what prices have been selling for in your area. You are told that everything to the North, West and South of you is a dark pool of real estate. You have no idea what prices are being paid for homes and may end up paying way too much or selling your house for way too little. Dark pools fly in the face of the concept of efficient pricing and the efficient market hypothesis of the stock exchange.
Our opinion is that while dark pools may help large volume traders they are not good for an efficient market. And, obviously, if important information is only shared within the dark pool it is illegal and likely to cause a fine from the SEC.
A New Dark Pool
When done properly a dark pool is not illegal and can be helpful to those who trade large blocks of stock. The Wall Street Journal reports that Credit Suisse Group AG is starting a dark pool for smaller stocks, small to mid-size companies, beginning in September 2015.
A “dark pool” stock-trading venue backed by Credit Suisse Group AG is planning a comeback following a fresh investment from a former bond-industry executive.
AX Trading Group Inc. is planning to go live in September with a dark pool for block-or large-scale-stock trades in small and midsize companies, nearly 21/2 years after closing because of low trading volumes. Dark pools are private trading venues where investors can anonymously buy and sell shares. AX Trading is aiming to address the challenge of completing large trades in thinly traded securities.
If you are interested in trading large blocks of stock in thinly traded stocks this approach could be helpful.