	Introduction

Traditionally, the exclusive locales for stock trades were exchanges such as the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX), and NASDAQ. In recent decades, cheaper and more powerful computer-based technology and at least two Securities and Exchange Commission (SEC) regulations helped give rise to an array of alternative trading venues, including a new type called "dark pools." Securities regulators and state officials have raised policy concerns about the pools, as have Members of Congress in various committee oversight hearings. Such concerns include the impact of the pools on market quality, their lack of pre-trade transparency, transparency about whether the pools allow high-frequency trading (HFT), and to what extent they do so. Another kind of ATS, "dark pools," do not provide quotes into the pre-trade public quote stream as is generally required of trades on the NASDAQ, the stock exchanges, and ECNs. This pre-trade opacity initially attracted institutional investors that wanted to anonymously trade blocks of shares without triggering unfavorable price movements. Front-running refers to the practice of trading ahead of a large order to benefit from the anticipated price movement that the large order will create. Like the aforementioned broker-dealer-owned dark pools, the transaction prices in pools are not calculated from the national best bid and offer (NBBO). Factors That Contributed to the Growth of Dark Pools

Economists perceive a mix of non-regulatory and regulatory factors to have played roles in boosting the popularity of dark pools, which reportedly grew from a share of about 4% of overall trading volume in 2008 to about 15% in 2013. Several such potential dark pool regulatory concerns are examined below, some of which are also discussed in the IOSCO report. Price Discovery

Because dark pools, which collectively account for a significant portion of trades in many stocks, do not publicly disseminate pre-trade data, there is concern that stock prices on the lit venues may not reflect the actual market price, thus impeding the price discovery process. A pending initiative will be a pilot project to be overseen by the SEC that will assess a protocol in which off-exchange trading venues, including dark pools, would be able to execute orders only if they could provide a significant price improvement or a significant size improvement. FINRA's New Trade Data Disclosure Requirements

In May 2014, FINRA began requiring ATSs, including dark pools, to report their aggregate weekly volume of transactions and number of trades by security, data that FINRA then reports on its website on a delayed basis. However, brokerage firms as well as the exchange BATS, which is owned by a brokerage firm that owns a dark pool, are reportedly critical of such trade-at rules. Canada and Australia Adopt "Trade-at" Rules

In 2012 and 2013, Canada and Australia (respectively) instituted system-wide trade-at rules for off-exchange orders, including in dark pools. The Potential for Future Regulation

In June 2014, Mary Jo White asked agency staff to draft recommendations for expanding the scope of the operational disclosures that dark pools and other ATSs might provide to both the SEC and the public. Enforcement Developments

Regulators and law enforcement authorities have taken a number of enforcement actions against dark pool owners for violations of laws or regulations. This section describes some examples of such actions, including a 2014 civil suit by the New York attorney general against Barclays, one of the largest dark pool operators, and some enforcement actions undertaken by the SEC and FINRA. The lawsuit charged, under New York state law's Martin Act, that Barclays falsified marketing material related to the extent and type of HFT in its dark pool.
The term "dark pools" generally refers to electronic stock trading platforms in which pre-trade bids and offers are not published and price information about the trade is only made public after the trade has been executed. This differs from trading in so-called "lit" venues, such as traditional stock exchanges, which provide pre-trade bids and offers publicly into the consolidated quote stream widely used to price stocks.
Dark pools arose partly due to demand from institutional investors seeking to buy or sell big blocks of shares without sparking large price movements. The volume of trading on dark pools has climbed significantly in recent years, from about 4% of overall trading volume in 2008 to about 15% in 2013. While dark pools reportedly have lower trading fees, their lack of price transparency has sparked concerns about the continued accuracy of consolidated stock price information. In addition, fairness concerns have surfaced in recent regulatory and enforcement actions, in the press, and in Michael Lewis's book Flash Boys over allegations that dark pool operators may have facilitated front-running of large institutional investors by high-frequency traders, in exchange for payment, and misrepresented the nature of high-frequency trading in the dark pools.
This report examines the confluence of factors that led to the rise of dark pools; the potential benefits and costs of such trading; some regulatory and congressional concerns over dark pools; recent regulatory developments by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), which oversees broker-dealers; and some recent lawsuits and enforcement actions garnering significant media attention. These include a 2014 civil suit filed by New York Attorney General Eric Schneiderman against the securities firm Barclays for its dark pool operations. A central allegation was that in marketing materials for prospective investors, Barclays misrepresented the extent and nature of the high-frequency trading in its pool. The report also examines steps regulators in Canada and Australia have taken to address any reduction in price transparency from dark pool trading.
Traditionally, the exclusive locales for stock trades were exchanges such as the New York Stock Exchange and NASDAQ. In recent decades, the availability of cheaper and more powerful computers and at least two SEC regulations—Regulation ATS and Regulation NMS—helped give rise to an array of alternative trading venues that include dark pools. SEC Chair Mary Jo White and others have voiced concerns that the pools impede the overall process of price discovery in stocks. Proponents of dark pools, however, point out that they have lowered trading costs and that they may afford faster trading or superior technology and enable investors to buy or sell larger blocks of stocks without moving the market.
In an effort to increase market transparency, FINRA in 2014 began requiring dark pools to report their aggregate weekly volume of transactions and the number of trades executed in each security. In June 2014, White asked SEC staff to draft recommendations for expanding the scope of operational disclosures that dark pools would have to provide to the SEC and the public. The SEC also announced a pilot project dubbed the "trade-at" rule, in which off-exchange trading venues, including dark pools, could execute orders only if they provided a significant price improvement or size improvement over "lit" venues. Both Canada and Australia saw significant reductions in dark pool trades after adopting such trade-at rules. Critics of the trade at rule include brokerage firms, some of whom own dark pools. Congress has examined regulatory concerns over dark pools in a number of 2014 hearings on high-frequency trading as part of its oversight over the SEC.