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Class action suit seeks to shine light on 'dark pool' practices

Did you buy stocks in the United States anytime between April 2009 and the present? If you did, there's new securities law litigation being launched on your behalf.

The claim being made in the class action is that dozens of high-frequency trading firms, brokerages and the major U.S. stock exchanges have been manipulating American securities markets through the use of so-called "dark pools."

Some astute California investors may be familiar with that term. We suspect many more are not. What dark pools are, as described by one expert for CNBC, are private trading markets that are generally owned and operated by brokerages. They used to be called "upstairs trading."

What makes them different is that they operate somewhat behind the scenes. The sizes of the trades and the prices involved aren't shared with the broader market until the moment of the transaction. They tend to be favored by large institutional investors, experts say, because their large-block trades can take place without creating major ripples in the market.

But the new suit, filed last week by the city of Providence, Rhode Island, alleges fraud on the part of the high-frequency trade exchanges operated by three major players. It says the dark pool markets have given participants an "informational advantage" over other investors. The result, says the suit, is that the firms have diverted "billions of dollars" away from buyers and sellers and into the brokerages' pockets.

Specifically, the alternate venue operators are alleged to have granted access to material trading information through the pools in return for kickbacks.

The filing of the suit comes as the practices of high-speed trading come under more regulatory scrutiny. Among the agencies acknowledging that they are looking into the industry are the Justice Department the Commodities Futures Exchange Commission and the Securities Exchange Commission.

What the fate of the suit is likely to be or what its ramification may be for the average investor is unclear. Those with questions would do well to consult with an attorney.

Source: Reuters, "Exchanges, brokerages hit with high-speed trading class action," Nate Raymond, April 18, 2014

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