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April 29, 2014 01:00 AM

High-frequency trading, dark pools, at top of investor concerns, survey finds

Arleen Jacobius
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    Investors are almost as concerned with the impact of high-frequency trading and dark pools as insider trading on the efficiency of the stock market, according to the results of a survey of institutional investors, asset managers and fund distributors by money manager Principal Global Investors and research firm, CREATE-Research released Monday at the Milken Global Conference in Beverly Hills, Calif.

    Some 55% of respondents indicated the proliferation of off-exchange trading avenues such as dark pools has a negative impact on the efficiency of the stock market and 52% of respondents cited high-frequency trading.

    Not all dark pools are bad, said Jim McCaughan, president and CEO of Principal Global Investors, in an interview.

    “Used thoughtfully, dark pools can help institutional investors,” Mr. McCaughan said. However, dark pools and high-frequency trading, which he has for the past couple of years called an institutional “front-running scheme,” needs to be fixed to restore investor confidence in the markets, he said.

    “I hate it when people say the market is rigged ... prices are not wrong,” Mr. McCaughan said.

    Instead, the system needs reform. Possible remedies include restricting the use of client information for trades, adding a so-called “messaging charge” to be paid by high-frequency traders to the exchanges to support their systems and creating an auction system that is basically speed bumps of every one or two seconds to push all traders to the same time frame, Mr. McCaughan said.

    The survey polled executives at 704 pension plans, sovereign wealth funds, insurance companies, asset managers and fund distributors.

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