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MARKETS TODAY US dark pools grow almost a half in past three years PUBLISHED: 20 NOV 2012 12:59:34 | UPDATED: 20 NOV 2012 15:55:27 PETER WELLS Yesterday the Sydney Morning Herald had a story about a guy who turned his backyard swimming pool into a pond, which he still swims in. The water’s dark, there are little fish and leaves in there. It’s probably like swimming in a creek. In any case, I read about this trend of converting pools to ponds a few years ago in the Financial Times’ How To Spend It magazine. And with that, what a segue I have created to take note of some findings about ‘dark pools’ from the FT. And we’re talking about equities trading here, not swimming. Citing a survey by the London-based CFA Institute, Philip Stafford reports trading of US equities on dark pools has grown by 48 per cent in the past three years, and accounts for 31 per cent of total market volume as of March. – Rhodri Preece, director of capital markets policy at the CFA and author of the report, estimated that there was a similar proportion in Europe. “The results suggest that dark trading does not harm market quality at its current levels but the gains are not indefinite,” he said. “If the majority of order flow is filled away from pre-trade transparent markets, investors could withdraw quotes because of the reduced likelihood of those orders being filled.It would be prudent for authorities to monitor these developments closely,” he said. – The study calculated that about 18 per cent of total volumes of trades were executed on broker-dealers’ own trading desks – a process known in the industry as “internalisation”. That figure included virtually all retail orders, Mr Preece said. Other block-trading venues, whether independent or bank-owned, accounted for 8-13 per cent of consolidated volume, the CFA said. Dark pools allow investors to trade large blocks of shares anonymously, with prices revealed only after trades are done. Sophisticated investors, in particular, have shifted toward dark pools from ‘lit’ markets (public exchanges) where there is a risk of the market moving against them when conducting a large order, or battling high-frequency traders. Twitter: @afrjackrabbit The Australian Financial Review