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SEC probes Pool

Date: Monday, June 25, 2012
Author: John Aidan Byrne

One of Wall Street’s most celebrated Dark Pools, Liquidnet, told its institutional clients last week that its new Equity Capital Markets (ECM) business was under investigation by the Securities and Exchange Commission.

At issue was an agency inspection that revealed “some shortcomings,” at ECM, according to a memo by Liquidnet CEO Seth Merrin.

The brouhaha revolves around its electronic tool that assisted in luring trading volume from issuers. While details are sketchy, the black eye for Liquidnet could be ironic.

Large investors, such as mutual and pension funds, welcome Dark Pools since, unlike “lit” markets, they are not supposed to publicly reveal details about their trades, according to Joe Saluzzi, co-head of equity trading at Themis Trading.

The trading firm’s name, the stock symbol and quantity of shares it wants to buy or sell are kept secret in dark markets. That assists large investors, who fear any disclosure in advance of their trade executions might tip off other investors — and result in an inferior execution and the bigger fish paying more than they might otherwise have in the “dark.”

Other Dark Pools include Goldman Sach’s SIGMAX, ITG’s POSIT and Pipeline.

Liquidnet’s average trade is 43,000 shares. In April, it traded 23 million US shares through two channels, according to Rosenblatt Securities.