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The secret stock market: Dark-Pools

'Dark pools' and other new-age exchanges rewrite the rules, under the radar

By David Weidner, MarketWatch

NEW YORK (MarketWatch) -- Fourteen floors above Seventh Avenue, in an office more than a mile from the trading floor of the New York Stock Exchange, a trumpet sounds reveille over a loudspeaker.

Liquidnet Holdings Inc., an alternative trading system used by institutions, has just executed a block trade of a million shares or more.

Unlike the bulk of trading in stocks, this trade was made anonymously and was executed outside of the market where retail investors and institutions meet. And unlike a trade on the floor of the New York Stock Exchange, no one will ever know who put a million shares up for sale and who just bought them.
Liquidnet is one of dozens of new private trading networks that -- in just two years' time -- have ushered in a sea change that challenges Wall Street's top institutions while posing vexing questions for regulators and investors alike.

Driven by the boom in electronic trading and other technological advances, a range of upstart entrepreneurs now are doing the kind of bulk trading that up until a few years ago was practiced exclusively in upstairs trading rooms at big brokerages like Morgan Stanley and Lehman Brothers.

"We're in the middle of a revolution," said Tim Mahoney, chief executive of BIDS, a trading system launched by a consortium of top-tier Wall Street firms.

These so-called alternative trading systems are propagating rapidly, are often labeled "dark pools" because of their nebulous and murky nature. Estimated to handle about 1 out 10 shares traded each day in the U.S., dark pools are meeting a need by institutions to grab or dump stocks quietly -- and anonymously. Like Liquidnet, many of them sport imaginative brand names in a nod to science fiction, such as Sigma X, VortEx and Block Alert.
In the harsh light of a public marketplace like the floor of the NYSE, an institution trying to pull off a massive trade runs the risk of making a big splash that will move the market. But in a dark pool, a big fish can jump in without so much as a ripple.

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http://www.marketwatch.com/news/story/story.aspx?guid={11EB6EC9-6D71-43C9-ADD2-59C6B9E3C5D1}

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