Darth Vader?? Interesting comments on black pools

Last year we spoke about the rise of black pools and we found an article in on Market Watch that discusses it.

Here is an extract of former SEC Commissioner Pitt's comments - may the force be with you:

Regulation

Mistrust of hedge funds is also the product of a landscape that is relatively lawless. SEC rules governing dark pools went into effect in 1998. Most agree that those measures, which allowed dark pools to become exchanges or broker-dealers, or neither by keeping their volumes low, is already outdated.

"Regulators have enormous problems," said Pitt, the former SEC chief. By the time regulators enact new rules, "the world has passed the statute by."

Pitt maintains that the dark pool name has hurt what is essentially a wholesale stock-trading industry.

"When I think of dark pools I think of the dark side and Darth Vader," Pitt said, adding that their lack of transparency does run counter to the regulatory emphasis on disclosure.

New rules for public exchange trading emphasize that customers should get the best price available, regardless of whether they're posted at the NYSE, Instinet or any other public market,

Unlike other markets, in dark pools "a level of transparency can lead to manipulation," Pitt said. On the contrary, the proliferation of dark pools also presents a problem: too many anonymous players and that "can produce disproportionately bad pricing."

Historically, the SEC didn't know how to regulate a market that looked like an exchange but wasn't an exchange.

For instance, brokers trade on their networks but also act as police, creating a conflict. Hedge funds are controversial players. Some systems exclude them and when Liquidnet offered to include them to boost its market share in a competitive market, some existing customers threatened to pull out.

Different venues have different rules. Pipeline doesn't force clients out of the system altogether, according to founder Fred Federspiel. When a violation is found, Pipeline rebuilds the platform to prevent abuse. "We have had to kick a few people out until we got a fix deployed," he said.

The discord over rules may change with the SEC's appointment of Erik R. Sirri, a Babson College economist, as the agency's chief market regulator in 2006. Sirri has said the commission is reviewing, not acting, on the issues presented by dark pools.