By John McCrank
(Reuters) - More transparency is needed in the U.S. stock market to help restore investor confidence and bring greater clarity as to how the market functions, a top member of the Securities and Exchange Commission said on Wednesday.
While markets have become more automated and efficient, they have also become so complicated and fragmented that complex products and market strategies are often not well understood by investors, the public and regulators, said Democratic SEC Commissioner Kara Stein.
"The current environment sometimes feels closer to a massive computer game than a system dedicated to allocating capital efficiently and serving investors," she said in prepared remarks to the Securities Traders Association in Washington DC.
Increased transparency around the operation of private stock trading venues, or "dark pools," along with better oversight tools for the SEC, and clearer obligations for market participants around electronic trading, are needed, she said.
There are nearly 40 U.S. dark pools, which are electronic, broker-run trading venues that only display trading data after a trade has occurred, reducing the chance of others in the market moving the price against it.
The lack of information available on how different dark pools operate makes it nearly impossible for investors to evaluate risks and make informed choices about different venues, which vary widely in pricing, order priority and customers, Stein said.
She said recent enforcement cases demonstrate serious problems in the functioning of some dark pools, which collectively account for nearly 20 percent of trading volume.
In August, brokerage firm ITG (N:ITG) agreed to pay $20.3 million to settle charges it ran a secret trading desk that profited off of confidential customer information within its dark pool. And in January, UBS AG
Stein said the SEC should "adopt dramatic reforms to bring transparency to dark venues," including making the rules that govern the various platforms public, and to make more execution and order data available.
Stein also called on the SEC to take more responsibility in the creation of a system that would enable it to track every order and trade made in the market, across venues and systems, which has been in the works for six years.
"While transparency cannot do it all, it can go a long way towards restoring confidence and faith in the integrity of our marketplace," she said.