The Securities and Exchange Commission will harm mutual funds should it force private venues known as dark pools to immediately announce they have executed orders, according to two former officials at the agency.
The SEC proposed in October that the industry's market data feeds include one more piece of information: the name of the dark pool that handled a given stock trade. This shift could cause money managers such as mutual funds and pension funds to get worse prices when they buy or sell large amounts of stock, Robert Colby and Erik Sirri said in the April issue of “Capital Markets Law Journal.” They ran the SEC's division of trading and markets during the financial crisis of 2007 and 2008.
Money managers turn to private, off-exchange platforms in part to avoid tipping off high-frequency traders, whose strategies include trying to detect when large blocks that may sway prices are being bought and sold. While institutional investors seek to mask their intentions, the SEC says that letting investors know a given trade was filled through a specific dark pool will improve market transparency.
“If you try to force institutions to show their orders, they'll just change their trading practices,” Mr. Colby, who was deputy director of the SEC's division of trading and markets when he left the agency after 27 years in February 2009, said in an interview. “The commission has to be very cautious when they try to get institutions to do things they're not willing to do.”