What are 'dark pools?'

U.S. Securities and Exchange Commission Chairwoman Mary Schapiro

TEXT OF STORY

KAI RYSSDAL:When he wasn't talking health care this week, President Obama was all about financial reform and we'll get to some of the finer points of what the president wants to do in our wrap later in the broadcast.

But last night in New York City, Mary Schapiro, the chairman of the Securities and Exchange Commission, outlined some reform plans of her own. In particular, Schapiro said the commission wants to shed some light on a corner of the financial markets known as "dark pools." Confused?

Fear not. Marketplace's Amy Scott's on hand to explain.


Amy Scott: When I hear the term "dark pool," I can't help but think of the "Creature from the Black Lagoon."

Clip from "Creature from the Black Lagoon": Science couldn't explain it, but there it was alive, in the deep, deep waters of the Amazon, immensely strong and destructive.

For a proper explanation, I called up finance professor James Angel at Georgetown, who had this to say.

James Angel: Mmm-mm-hm-wah-ha-ha.

Actually, Angel says, dark pools aren't that scary. They're really just a way for investors to trade big blocks of stock anonymously. In a normal stock exchange, everybody knows who's buying and selling. In a dark pool, you don't. Buyers and sellers send out secret messages.

The dark pool acts as a matchmaker.

Angel: So this is a way that you can explore in the dark to see if you can find the other side of your trade, without having to announce it to the entire world.

Why not announce your intent to buy or sell?

Bill O'Brien is CEO of the electronic trading firm DirectEdge. He says if say your mutual fund manager wants to make a big trade and everybody knows, that can cause huge swings in the price.

Bill O'Brien: That might impact the market such that he has to wind up paying a lot more, or if he's selling, getting a lot less when getting that trade done.

Officials at the SEC worry all this secret trading in murky waters could cause suspicion and speculation in the public markets and deprive investors of information.

But Georgetown's Angel says the SEC has more sinister things to worry about, like the next Bernie Madoff.

In New York, I'm Amy Scott for Marketplace.

About the author

Amy Scott is Marketplace’s education correspondent covering the K-12 and higher education beats, as well as general business and economic stories.

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