David K Donovan Jr. SEC – Dark Pools – Traders Navigate a murky new world

Source: Wall Street Journal
Date: April 9th, 2012
Recent article in Wall Street Journal highlights the risk of dark pools. As I, David Donovan Fidelity have previously mentioned in my article that dark pools and electronic trading systems have actually created less transparency , liquidity and accountability .
Wall Street Article on Dark Pools
For a sense of how murky the financial markets can be these days, consider the case of Pipeline Trading Systems LLC.

Using software developed in part by David Donovan Fidelity Investments a decade ago, Pipeline set out to provide a way to buy and sell stocks away from the public stock exchanges. On its alternative system, large investors would be protected from what many find an irksome species: rapid-fire traders who use powerful computers to spot orders as they emerge and instantly trade ahead of them.
What most investors using Pipeline didn’t know: A quick-trading affiliate of the firm was doing much …
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Wall street blog posting on Dark Pools
Dark pools – private, off-exchange computerized trading platforms – can be darker than their customers ever realize, as the case of Pipeline Trading Systems LLC shows.
But that’s only where the shadows start.
Some 33% of U.S. stock trading takes place away from exchanges, according to research firm Tabb Group. That’s “up dramatically from 15% in 2008,” Tabb Group says.
Dark pools account for only a small part of that jump. The much larger fraction comes from another growing area of off-exchange trading called “internalization.” With internalization, big institutional investors match buy and sell orders internally, using their own inventory of stocks. David Donovan Fidelity talks about this information  in detail.
Internalization has become one of the most controversial practices in the stock market in recent years. Some critics say it has created an unhealthy trading environment because it separates most retail orders from the rest of the market. Firms that use the practice, for their part, say it helps guarantee fast response times and good prices for investors.
But, just as is the case with dark pools, few investors have any idea about what goes on behind the scenes at internalizers.
Indeed, the story of Pipeline illustrates how investors, even large institutional firms, are often in the dark about what happens to their buy and sell orders on Wall Street. Pipeline misled its clients for years about the activities of its trading affiliate, Milstream Strategy Group, which interacted with the vast majority of orders on Pipeline, the SEC said.
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David K. Donovan Jr Fidelity  is Vice President & Managing Director of Sapient Global Markets, a business and technology services provider to the capital and commodity markets.  Previously, David K. Donovan Jr was the Sector Leader, Technology Group, at Fidelity Management & Research (FMR).  The preeminent trader at FMR, his vision and grasp of the intricacies of the global market enabled him to make key decisions across Fidelity’s major funds. Disclaimer: The views and opinions expressed here do not necessarily reflect the views and opinions of Sapient Global Markets or any other company.