Robert Hatch · July 2010
78 GEO. WASH. L. REV. 1032 (2010)
When the Securities Act of 1933 and the Securities Exchange Act of 1934 were first drafted, President Roosevelt expected that they would establish an equitable market system primarily by requiring public companies to follow a strict regimen of disclosure to investors. Considering New Deal rhetoric concerning light and sunshine, however, it is quite ironic that trading structures ominously referred to as “dark pools of liquidity” now flourish in the nation’s stock market system.
Dark pools present important problems to the U.S. Securities and Exchange Commission (“SEC” or “Commission”), the government regulatory body tasked with providing investor protection and promulgating administrative rules that foster efficient capital formation. Dark pools are trading venues that rely on innovative and sophisticated software. To certain groups of investors, they allow for the efficient execution of trading strategies that can be immensely profitable. In other respects, however, dark pools certainly deserve their shadowy-sounding name; they are a venue apart, failing to provide information that is available on public stock exchanges such as the NASDAQ or New York Stock Exchange. While the vast majority of stock trades continue to happen on “light venues” of this latter type, the influence of dark pools has grown steadily to include over seven percent of all U.S. stock trades. Although the growth of dark pools was originally viewed with some measure of apathy by the SEC, increased regulation of these venues now constitutes one of the major policy proposals of the recently appointed SEC Chairman, Mary Schapiro.
On November 13, 2009, the SEC released a new rules proposal that could drastically change not only the workings of dark pools, but of other alternative stock trading venues that compete with national exchanges. In explaining what these rules entail and commenting on their desirability, this Essay seeks to explain and evaluate how the SEC has addressed problems associated with one perceived regulatory loophole. Part I begins by providing an explanation of what dark pools are, how they have developed over time, and why they are growing in popularity. Part II discusses the reactions of different segments of the finance community to dark pools of liquidity and gives a synopsis of different regulatory reactions that have been suggested to the Commission. Part III discusses the actual SEC proposal. Overall, if adopted, elements of the SEC proposal would shed beneficial light on certain processes that now occur in dark pools. Other items of the proposal, however, seem to have much less potential to create meaningful change. In essence, portions of the SEC proposal may represent an unnecessary smokescreen that may hurt the efficiency and competitiveness of U.S. financial markets.
