The fragmentation of electronic trading platforms has allowed dark pools to be created, and they are normally accessed through crossing networks or directly among market participants via private contractual arrangements.
[10] The next big development in dark pools came in 2007 when the SEC passed Regulation NMS (National Market System), which allowed investors to bypass public exchanges to gain price improvements.
This was spurred on with the improvements of technology and increasing speed of execution as high-frequency trading took advantage of these dark pools.
[citation needed] Dark liquidity pools offer institutional investors many of the efficiencies associated with trading on the exchanges' public limit order books but without showing their actions to others.
Therefore, detailed information about the volumes and types of transactions is left to the crossing network to report to clients only if they desire or are contractually obliged to do so.
Modern electronic trading platforms and the lack of human interaction have reduced the time scale on market movements.
[citation needed] To lessen this adverse impact on price discovery, off-market venues can still report consolidated data on trades publicly.
By this route, the trades occurring in dark pools can continue to contribute to price discovery, albeit with a little delay.
[20] Another type of adverse selection is caused on a very short-term basis by the economics of dark pools versus displayed markets.
On the other hand, if the buy-side institution were floating their order in the prop desk's broker dark pool, then the economics make it very favorable to the prop desk—they pay little or no access fee to access their own dark pool, and the parent broker gets tape revenue for printing the trade on an exchange.
[citation needed] The use of dark pools for trading has also attracted controversy and regulatory action in part due to their opaque nature and conflicts of interest by the operator of the dark pool and the participants, a subject that was the focus of Flash Boys, a non-fiction book published in 2014 by Michael Lewis about high-frequency trading (HFT) in financial markets.
[25] In the Pipeline case, the firm attempted to provide a trading system that would protect investors from the open, public electronic marketplace.
In that system, investors' orders would be made public on the consolidated tape as soon as they were announced, which traders characterized as "playing poker with your cards face up".
[27] In 2009 the U.S. Securities and Exchange Commission (SEC) announced that it was proposing measures to increase the transparency of dark pools, "so investors get a clearer view of stock prices and liquidity".
These requirements would involve that information about investor interest in buying or selling stock be made available to the public, instead of to only the members of a dark pools.
[citation needed] In June 2014 the U.S. state of New York filed a lawsuit against Barclays alleging the bank defrauded and deceived investors over its dark pool.
A central allegation of the suit is that Barclays misrepresented the level of aggressive HFT activity in its dark pool to other clients.
[31] In January 2015 the U.S. regulators imposed a fine on UBS Group AG’s dark pool for failing to follow rules designed to ensure stock trades are executed fairly.
It said UBS let customers submit orders at prices denominated in increments smaller than a penny, something SEC rules prohibit because it can be used to get a better place in line when buying or selling stock.
The ability to trade in sub-penny increments also wasn’t widely disclosed to UBS customers, and was instead pitched secretly to market makers including high-frequency traders, according to the SEC.
[37] However, under section 5[38] of the Securities Exchange Act of 1934 and Regulation ATS of 1998, off-exchange trading was allowed for up to five percent of the national volume of a stock.
[41] A review of these forms revealed a number of differences, including "tiering", "pegging", and "immediate-or-cancel (IOC)" orders, as well as a special features such as a speed bump by IEX to prevent high-frequency trading.