'Dark Pools' Are Handling More Stock Trades. Wall Street Is Fighting Back. -- Barrons.com

Dow Jones
07/01

By Bill Alpert

A trading platform called IntelligentCross has gotten under Wall Street's skin.

This year, it passed UBS to become the largest of "dark pools" -- those off-exchange platforms where institutions can trade without broadcasting their buying or selling intentions to the world. In February, IntelligentCross handled nearly 3% of the nation's stock trades.

Some of those trades were for Wells Fargo Securities, which reported sending almost 75% of its market orders for S&P 500 stocks to IntelligentCross in March. By comparison, the big market maker Citadel Securities only got 2.5%, while Nasdaq got less than 1%.

A subsidiary of Stamford, Conn.-based fintech Imperative Ex, IntelligentCross has even bigger ambitions. With the backing of the industry self-regulator Finra, it has been asking the U.S. Securities and Exchange Commission to let it set national stock prices, like an exchange does. Instead of running dark, IntelligentCross prices would become part of marketwide quotes. Then SEC rules would oblige brokers to send it their orders if it has the best prices.

An array of Wall Street players oppose its request, including the market maker Citadel Securities, founded by billionaire Ken Griffin, Nasdaq, and some leading trade groups. Their letters to the SEC say that IntelligentCross handles trades in ways that can favor some traders over others.

With no explanation, the SEC has sat on the proposal for two years. It declined any comment to Barron's.

"We don't agree that the IntelligentCross matching process provides either side to a trade with any form of advantage," says Imperative Ex CEO Roman Ginis. "But it is no surprise that certain detractors of the proposal are claiming so, to maintain their status quo under the current landscape."

If IntelligentCross gets the SEC's nod, and gains order flow, then other pools might follow its example. Their combined share of market volume has stayed around 15% for the last five years. Additional flow might come at the expense of stock exchanges. In the last quarter of 2024, the exchanges' share of trading fell below 50% for the first time, with big market makers handling the rest.

Running a trading venue is a profitable business. This year, analysts expect Nasdaq to earn a cash operating margin of 57% on $5 billion in revenue. Market maker Virtu Financial is expected to earn a 58% margin on $1.8 billion in revenue this year.

Exchanges and pools have different ways of providing traders with liquidity -- which is the ability to immediately trade something at the price and amount that you want.

On an exchange, much of the liquidity comes from market-makers, who hold inventory in a stock, with the exchange displaying the prices at which they will buy or sell. A spread between the bid and offer is their profit. The quotes from all 28 exchanges get reported on the consolidated "tape," so brokers can see the best available price in a stock.

Pools get some of their liquidity from market makers, but mostly they match the order flows of institutional customers. Buy and sell orders typically get matched at the midpoint of the best public quote, with the pool charging a fee per trade. Only the pool's subscribers see the price of offered trades.

Pools are supervised by Finra and operate under loose rules that the SEC created in 1998, when electronic networks like Instinet began taking some trading volume from exchanges.

Stock exchanges regulate their members and must get SEC approval for operational changes, says Haoxiang Zhu, a finance professor at MIT's Sloan School of Management who was a top SEC official between 2021 and 2024.

The rules for dark pools allow flexibility, says Zhu. Pools can merely file a note informing the agency of a change in their operations. While an exchange must provide fair access to anyone who wants to trade, a pool can discriminate as long as its trading in any stock remains below 5% of the stock's total market volume.

That leaves pools freer to innovate. IEX was a pool when it launched the fiber-optic-fenced refuge from high-speed trading that Michael Lewis made famous in the book Flash Boys. Later on, it became an exchange.

OneChronos uses a formula that matches stock trades at the prices where the most volume traded. At PureStream, orders are matched at a percentage rate of market-wide trade events, creating a concurrent stream of filled orders.

These complex protocols are designed to let fund managers accumulate or unload shares without attracting notice. That allows them to get in or out of a big position without moving a stock's price.

To avoid tipping off predatory traders, institutional traders often split their big orders into pieces that they scatter across trading venues. They will even stagger the orders by fractions of a second, so they hit distant venues simultaneously.

Others in the stock market are watching out for those trades. High-frequency trading firms use algorithms to sniff out the start of an institutional trading program, and then try to front-run the remaining pieces -- like people who buy land where they learn a theme park is planned.

Market makers also watch for the waves of an institution's orders, which can move stock prices and can cause a loss on the market maker's share inventory. That is why wholesale market makers like Citadel Securities and Virtu Financial make deals to get a retail brokers' orders. Those orders of small investors generally lack direction, so the market maker can provide better prices to the retail brokers' customers.

Among IntelligentCross's lures for big traders are "private rooms" -- where a customer like Wells Fargo can set its own rules for trading, and admit only the counterparties it chooses. By screening out high-speed traders, the private room host hopes to get better prices on bigger trades.

"With Intelligent Cross Hosted Pools, you can design a personalized trading environment tailored to your needs," IntelligentCross advertises. "You decide the who, how, and when."

The exclusivity of private rooms bothers some trading desks. "That liquidity isn't accessible for the rest of the market," says Joe Saluzzi, who heads the institutional trading firm Themis Trading.

In an April memo to the SEC, Citadel Securities complained that private rooms can discriminate and run trades in ways they need not disclose, because they keep their volume in a stock below 5% of the market. It said the SEC should lower the 5% threshold that triggers the fair-access rule. The agency had no comment on the matter.

Amid the fuss over its private rooms, IntelligentCross marketing chief Lorna Boucher told Barron's that well over 90% of the platform's volume is done in "all-to-all" matching among its subscribers.

"For the last couple of months, we've been the No. 1 venue for midpoint executions, across all [pools] and exchanges," she said. Those trades happen outside of private rooms.

Another innovation at IntelligentCross is its ASPEN matching engine. That is the system whose quotes the pool wants the SEC to make part of nationally displayed prices. Then IntelligentCross will have a "protected quote," meaning that brokers trying to buy or sell a stock will have to send orders to the pool whenever it posts better marketwide prices than exchanges.

"Not including IntelligentCross-displayed quotes as a protected quote has allowed market participants to effectively 'ignore' the IntelligentCross quote, even when it is the best displayed quote in the market," said Roman Ginis of Imperative Ex.

Finra first asked the SEC to give IntelligentCross a protected quote in December 2022, saying the quotes would appear on a little-used Finra quote display facility. SEC staff members agreed, and recommended approval in August 2023. The next day, SEC commissioners put the proposal on hold, so they could receive additional industry comments.

In the two years since the SEC stayed the approval order, Ginis says that exchanges and other venues have traded some 27.6 billion shares, worth $1.95 trillion, at prices worse than those that were displayed at IntelligentCross ASPEN.

Comments received by the SEC during that time mostly oppose forcing traders to route to the pool's quotes, because ASPEN has two unusual features: It only matches orders after a delay, and lets traders cancel their order during that interval.

On the surface, ASPEN's delay is a speed bump like the one pioneered by IEX 10 years ago. At IEX, a fiberoptic coil delays all traffic into its exchange by 350 millionths of a second. That small fixed delay is enough to foil computerized traders who otherwise might see one piece of an institution's trade on IEX, and then race to other venues to move a stock's price before other pieces get there.

IntelligentCross delays matching trades by an interval that can vary between 150 and 900 millionths of a second, based on the prior day's trading.

Generally, the delay is at the longer end, said Citadel Securities in a comment to the SEC. It said that Citadel's studies of ASPEN's delay found it was hardly ever shorter than 500 millionths of a second, and 75% of the time it is as long as 800 or 900 millionths of a second. Longer delays make front-running a trade easier, Citadel said.

"In electronic trading, this is an eternity," said Citadel in an April 3 letter to the SEC. In less than 500 millionths of a second, a computerized trader can see if prices have moved at other venues, then act.

Among the potential actions is canceling a quote. A problem with protecting the pool's quotes, say Citadel and others, is that IntelligentCross lets traders cancel orders during its delay.

A firm that posts a quote on ASPEN has time to see if prices move at other venues. It can then back out before the ASPEN match. Traders on the other side of the match would have been obliged to send orders to the pool, under the protected-quote rule, but those traders won't have time pull back their order, say Citadel and other commenters.

A speedy trader posting protected quotes on ASPEN would have a one-sided advantage to avoid losses and front-run others, said Citadel in its April 3 letter to the SEC. That is a valuable subsidy for the dark pool and some of its customers, Citadel said.

Intelligent Cross disagrees. ASPEN doesn't give an advantage to one side in its matching process, says IntelligentCross founder Ginis, because any trader can cancel his or her order. Those opposing IntelligentCross's request to join the club of protected national quotes are trying to avoid competing with its better-priced quotes, he suggests.

Finra wouldn't comment to Barron's when asked about the IntelligentCross proposal and the fees Finra might earn from hosting the pool's quotes on its underused display facility. In a March 13 update to its SEC application, Finra says IntelligentCross has tweaked its matching process and addressed all critics' concerns.

The IntelligentCross proposal has supporters.

Giving the pool a protected quote would bring out more liquidity, says an April comment letter from Point72 Private Investments, an affiliate of Steven Cohen's hedge fund firm, which describes itself as one of the first investors in the pool's parent.

The IntelligentCross delay doesn't favor one trader over another, the SEC was told in an April letter from Eric Swanson, who heads the American unit of XTX, a quantitative market maker based in London.

"The proposal reflects the type of innovation the Commission should be encouraging to make our equities market fairer and more efficient," he wrote. Swanson told Barron's that his firm is an investor and customer.

The enthusiasm of XTX for the IntelligentCross proposal fuels suspicion among trading industry executives, who tell Barron's that the highly automated XTX would be positioned to benefit as a trader posting protected quotes in IntelligentCross's delayed setting. In white papers, XTX disputes that, saying that delayed-matching venues can promote liquidity for all legitimate fund managers and market makers.

One last concern about forcing orders into the pool is that pools are relatively unregulated.

Traders shouldn't be forced to use the lightly regulated pools, the capital markets advocacy group Healthy Markets told the SEC. Unlike an exchange, "IntelligentCross wouldn't need regulators' blessings to implement changes to its operations, governance, or fees," wrote the group's CEO Tyler Gellasch.

Nasdaq, in its comment letter, calls Finra's proposal a regulatory arbitrage. If a pool wants the quote protection of an exchange, Nasdaq says it should become one -- like IEX did -- and assume the regulatory burdens of an exchange, too.

"If a pool can just pop up, put its quote on Finra's display facility and get order protection, why would anyone be an exchange anymore?" a trading firm executive told Barron's.

Write to Bill Alpert at william.alpert@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

 

(END) Dow Jones Newswires

July 01, 2025 02:30 ET (06:30 GMT)

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