According to Chad Johnson, head of NY Investor Protection Bureau, high frequency traders (HFTs) and dark pool operators need to do “some soul-searching” to improve their industry. The increased scrutiny of HFTs and dark pools (anonymous liquidity) has caused some to change how they conduct their business. For instance, Goldman Sachs is looking to step away from their highly successful dark pool, Sigma-X. While retail brokers, such as Interactive Brokers (IB), are creating technology that routes orders fairly and away from dark pools. IB, also, does not send orders to specific exchanges for rebates, or a payment-for-order scheme.
The New York attorney general’s office has an ongoing probe into how these market entities operate. A large concern is that broker-dealers have a clear conflict of interest when orders are routed to specific changes in exchange for a rebate. Dark pools cause concern due to their anonymity. Orders routed into a dark pool may not receive the national best bid and offer (NBBO). This regulation ensures that traders receive the best bid and the best offer available in real-time, but dark pools may cloud this process.
Attorney General Eric Schneiderman opened a broad investigation into whether U.S. stock exchanges and alternative venues such as dark pools provide high-frequency traders with improper advantages. Schniderman has also been vocal on the unfair advantages to high speed trading and the ability to process information quicker than human counterparts.