Asset owners are paying a lot more attention to where their money managers execute trades — decisions that have generally been left to the discretion of the managers — and some are considering directing their managers to avoid specific venues.
Conversations among investment executives at pension funds and endowments about banning trading venues has “only just started to happen.” said Monte Tarbox, executive director, investments, for the $11.7 billion defined benefit plan of the National Electrical Benefit Fund, Washington.
Mr. Tarbox said managers' responses to his concerns have varied. “Some are very concerned; others say "commissions and spreads have improved, so we're not going to worry about it.' That's what concerns me. ... High-speed traders are eating somebody's lunch, and it's probably my lunch.”
NEBF is “not quite at that point” where it will direct managers away from trading on certain venues, Mr. Tarbox said. “We're seeing which venues our managers are trading in and if we're getting best execution,” he said. “We're still trying to get a handle on it.”
Interest in trading venues gained in intensity since New York State Attorney General Eric Schneiderman filed suit in June against Barclays PLC, accusing the firm of giving misleading information on its Barclays LX dark pool.
But some industry experts say the increased interest began with the debut of Michael Lewis' book, “Flash Boys.” Also spurring the added scrutiny is the Securities and Exchange Commission's efforts to bring more transparency to dark-pool trading, as well as recent disclosures by dark-pool operators Goldman Sachs Group Inc., Morgan Stanley, UBS, Deutsche Bank AG and Credit Suisse Group that they're under investigation, either by the SEC or by Mr. Schneiderman's office.
“There's definitely a trend. It's definitely accelerated, in large part because of the publicity around "Flash Boys,'” said Robert Hegarty, former managing director, global head of market structure at Thomson Reuters, Boston, and now an independent consultant. Asset owners “have instructed (money) managers to direct order flows to specific venues, but they're also banning certain venues.”
Investment executives at several pension funds, endowments and sovereign wealth funds contacted for this story would not talk about whether they've directed their money managers to avoid some dark pools, but one who asked not to be identified said he has talked with money managers about not trading in certain dark pools “that have been in the news of late.”