Q. There are reports that the heads of the major exchanges want to curb trading of stocks in “dark pools” with something called a “trade-at” rule. You’ve talked about dark pools before, but let’s start with what they are.
A. They are private, baby stock exchanges that operate “in the dark”, without disclosing their orders and trades in real time to the other exchanges the way the public exchanges must. They started as order matching services for very large block trades, but have evolved in real threats to the exchanges… some estimates say 40% of the trades in stocks these days are happening away from the public exchanges.

Q. That’s an enormous number. Is that all “dark pool” volume, or is the off-market exchange trading happening in other places, too?
A. Good point– dark pools get all the press, but in fact a lot of this non-exchange trading is happening inside brokerages themselves, or at wholesalers, who offset retail trades against each other inside their own walls, rather than sending them to the exchanges for execution.

Q. OK, so what would a “trade at” rule do?
A. It would require a stock trade to occur on a public exchange unless a significantly better price was available elsewhere, say, half a cent or more. That would probably fix the problem, but at this point lots of people are making lots of money by operating private markets in stocks, so its controversial.

Q. So it would force volume back to regular exchanges. But what’s really the problem here? Why should the SEC care about all this?
A. On a high level, liquid, transparent markets are simply necessary to ensure people are getting the best prices when they buy and sell stocks. And more and more, there are specific complaints that orders are being posted on, say, the NYSE and not getting executed, while an identical trade gets executed at a thousandth of a penny less, a few microseconds later, in a dark pool and leaves the public exchange traded unfilled. Not good.

Q. So there’s concern that a real two tier market could to develop?
A. Yes. If I can trade in a dark pool when I need to, I’m less inclined to offer best pricing on the public exchanges… and that has some extremely damaging long term implications for the markets..