SEC's Atkins OK with "dark pools"

By Joseph A. Giannone

WASHINGTON (Reuters) - Regulators should lighten up on trading networks known as "dark pools," U.S. Securities and Exchange Commission member Paul Atkins said on Tuesday.

Advances in technology, and the desire to keep trade strategies secret, has fueled a proliferation of these networks that offer investors an anonymous platform for trading stocks.

Stock exchange and some SEC officials have warned these trading systems threaten to fragment markets and could lead to less attractive pricing. Traditional exchanges also warn investors could be harmed if broker dealers take advantage of transactions hidden from the public eye.

But Atkins told the Reuters Regulation Summit in Washington it makes sense that investors prefer to keep their trades out of sight and not tip their hand to others.

"We would be crazy to try to go and shut that down. I think that redounds unfavorably to investors, and eventually to mutual funds and (pension) beneficiaries," Atkins said.

"It's a big world out there. These trades can easily be done offshore, through derivatives and through other weird instruments," he said.

That position conflicts with statements made by SEC officials at a September trading conference.

The desire for speed and anonymity has helped fuel the rapid growth of electronic trading networks like Archipelago, now owned by the NYSE Group (NYX.N: Quote, Profile, Research, Stock Buzz), Instinet and Investment Technology Group (ITG.N: Quote, Profile, Research, Stock Buzz).

More recently the market has seen an explosion of matching systems operated by groups like Lava or Liquidnet, while Wall Street brokers announce plans to build their own networks. A recent TowerGroup study estimated that dark pool trading volume has tripled since 2004, though it still comprises just 5 percent of stock market activity.

These platforms continue a trend seen for years now, as broker-dealers complete more trades in house, or among themselves, without sending them "downstairs" to the floor of the stock exchange.

"You've always had the upstairs market on the New York Stock Exchange, and notwithstanding some of the rules of the Exchange that try to get everything on the floor, people found ways to do it off-exchange or after hours," Atkins said.

Atkins also dismissed fears that investors are unprotected if dark pools expand unchecked, or that public markets will suffer.

"I never bought the argument of fragmentation," he said. "People were worried about ECNs (electronic communications networks) not talking to each other, but you've got Lava and other sorts, where they've linked all these things."

Atkins the longest serving member of the commission, recalled that the SEC considered regulating the electronic networks in the early 1990s, but ultimately held off. That would have stifled development of these faster trading systems, he said.