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Dark markets may be more harmful than high-frequency trading


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40 percent?!

But the rise of "off-exchange trading" is terrible for the broader market because it reduces price transparency a lot, critics of the system say. The problem is these venues price their transactions off of the published prices on the exchanges - and if those prices lack integrity then "dark pool" pricing will itself be skewed.

Around 40 percent of all U.S. stock trades, including almost all orders from "mom and pop" investors, now happen "off exchange," up from around 16 percent six years ago.

This trend is "a real concern," John Ramsay, former head of the U.S. Securities and Exchange Commission's (SEC) Trading and Markets division, said on the sidelines of a conference in February. "We have academic data now that suggests that, yes, in fact there is a point beyond which the level of dark trading for particular securities can really erode market quality."

Given the $21.4 trillion worth of U.S. stocks that were traded in 2012, even a small mispricing can move the needle by tens of billions of dollars.

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