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Regulators Take a Closer Look at Dark Pools

“WASHINGTON—Regulators are ramping up scrutiny of an opaque corner of the market where stocks change hands in the dark.

The Financial Industry Regulatory Authority, Wall Street’s self-regulatory body, last month sent 15 examination letters to operators of “dark pools”—lightly regulated, off-exchange trading venues that have been a rising concern for regulators and some investors as more activity shifts away from exchanges.

Finra is seeking details about how the increasingly popular venues operate, what they disclose to clients and whether they adequately police trades. It could bring enforcement action against dark-pool operators or issue recommendations for tighter oversight, depending on the answers it receives and additional examinations, said John Malitzis, executive vice president of market regulation at Finra. The letters are a follow-up to an initial round of questions the regulator circulated last fall.

“We want to understand whether [dark pools] are disclosing to their customers how their orders work [and] whether customers are informed who their orders will interact with,” Mr. Malitzis said in an interview. “A big part of this is to get an understanding of practices that may or may not be problematic.”

Credit Suisse Group AG, CSGN.VX -1.56% Goldman Sachs Group Inc. GS -2.14%and Barclays BARC.LN -2.31% PLC, which operate three of the largest U.S. dark pools, were among the firms that received a letter, according to people familiar with the matter. Representatives for the three banks declined to comment.

Dark pools don’t disclose traders’ buy or sell orders and only publish trade data after transactions occur. About 13% of all stock-market action takes place on dark pools, up from about 4% five years ago, according to Tabb Group, a market-research firm. Most dark pools are run by broker-dealers—firms overseen by Finra that buy and sell assets on behalf of customers as well as trade for their own accounts.

While dark pools command an expanding slice of trading volume, regulators still have little idea about how they operate since, unlike exchanges, they aren’t required to regularly disclose detailed information about their trading systems. Finra is weighing whether to submit a plan to the Securities and Exchange Commission this summer that would allow it to more closely track dark-pool trading volumes…..”

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