Fund Firm Dark Pool Seeks Transparency in Opaque Corner

The new dark pool for fund managers announced by Fidelity Investments and others is the latest attempt to bring transparency to part of the market seen as cloaked in secrecy.

Fidelity, BlackRock Inc. (BLK) and seven other asset managers unveiled Luminex, an industry-owned dark pool where they say the biggest investors will know the rules and be kept free of interference from speculators. The venture follows a year in which the reputations of private electronic equity venues suffered as regulators uncovered evidence of deception.

While ambitious, the model described by the fund companies bears resemblances to venues already in operation, in particular one run by Liquidnet Holdings Inc. That platform, opened in 2001 by Seth Merrin and serving about 760 fund companies in 43 markets worldwide, ranked 20th among the biggest American dark pools by volume, according to the latest data.

It would be wonderful if everybody put all their eggs in the Liquidnet basket, Merrin said in a telephone interview today. We look at this as them throwing their hands up in the air and saying, Were fed up with this market structure, Were fed up with the shenanigans.

(Bloomberg LP, the parent of Bloomberg News, owns a stake in Bids Trading LP, which operates a dark pool geared toward block trading.)

At Merrins Liquidnet, the average size of trades is more than 40,000 shares, about 200 times greater than those found on most venues. The platform has found a niche as a crossing network where the biggest investors wait for counterparties to show up with orders that match theirs.

That model stands in contrast to most of the U.S. equity landscape, where market makers intermediate trades between investors who want to do business right away. Liquidnet did just over 22 million shares in the week of Dec. 29, according to the Financial Industry Regulatory Authority. The two biggest dark pools, both run by brokerages, did almost 10 times that.

The Finra figures only include trading of the biggest U.S. stocks.

Theres always room for intermediation because most stocks are not going to find their natural other side, Merrin said. What they are saying is that the regulations and current solutions out there are not doing enough to help their specific business.

IEX Group Inc., made famous by Michael Lewiss Flash Boys book, is owned by a consortium including hedge funds and mutual funds. It opened for business on Oct. 25, 2013, and its share of total U.S. equity trading hit 1 percent in November.

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Fund Firm Dark Pool Seeks Transparency in Opaque Corner