Equity prices from the New York Stock Exchange and Nasdaq flash across television screens, computers and mobile phones constantly. But there is a flourishing and hidden side to the business of buying and selling shares that most investors are not aware of.

The Securities and Exchange Commission is expected to expand on recent proposals governing this hidden side, so-called “dark pools”, which has grown in recent years. Last week the regulator started a 90-day consultation for suggestions on further proposals to reform the operations of dark pools.

Mary Schapiro, SEC chair, on Tuesday reiterated the importance of looking at dark pools. “As regulators, we at the SEC are mindful of the extraordinary technological advances and the benefits they [dark pools] have brought over the years. But, we are also mindful of the potential for participants to exploit these advances in ways that harm, rather than help, investors.”

In contrast to public trading in shares done on exchanges, where volumes and prices are immediately visible, dark pools trading is done behind closed doors, in private networks, run by independent operators, exchanges and banks, where buy and sell orders can be matched without prices being revealed.

By being set apart from the public exchanges, they can faciliate the trading of large parcels of shares - sometimes called block trades - as they provide an anonymous venue for transactions.

They have become increasingly attractive for institutional investors as narrow bid-offer prices and electronic trading has made executing large share orders a lot more difficult. Institutional investors say they need a venue to place large orders in a way that does not roil the market and cost them more money. The worry about dark pools is that by trading away from public exchanges, they could create a two-tiered market and one which may favour a subset of investors at the expense of the broad market. Given the lack of transparency about prices in dark pools, it is difficult to gauge whether such a two-tiered market exists.

A true definition of a dark pool transaction is one where an investor anonymously sends an order into a dark pool, a request to buy, say, 10,000 shares in a company at the market price and only receives a confirmation once the trade has been completed.

This helps investors transact large amounts of shares because trying to do a large trade in public on an exchange would alert the broad market and risk moving the share price sharply against them.

But a concern for the SEC is how some dark pools are allowing information about trading intentions to be transmitted ahead of a transaction to a select group of investors, potentially giving these select investors beneficial market knowledge. Similar to flash orders on an exchange, which the SEC moved to ban last month, these so-called indications of interest, or IOIs, are used by “grey” pools, blurring the line between trading in dark pools and quotes on an exchange.

In general, large operators of dark pools could well increase their share of trading at the expense of others, while exchanges may not see a migration of business back to the public markets. While the SEC is lauded for shining a light on dark pools, its efforts could well encourage investors to use those dark pools which are seen doing lots of business in specific stocks.

“The market is looking for more details about the proposals from the SEC,” said Sang Lee, managing principal at Aite Group.

The SEC appears to be focusing on a subset of around 10 out of the 30 private trading venues, which use so-called actionable IOIs that provide more detail about trading intentions than a standard IOI.

The SEC proposes that actionable IOIs, similar to a typical buy or sell quote on an exchange, are treated like other quotes and subject to the same disclosure rules as quotes on exchanges.

Kevin Foley, president and chief executive of AQUA, an alternative trading system (ATS) for block trades, a form of dark pool, believes that the SEC has acted now because IOIs could create a two-tier market if the use of them increases. But he adds, “very little information is going to be released publicly as a result of these changes.”

The SEC’s proposals on IOIs, should they become law, will result in many such IOIs being halted. “IOIs are a lot more prevalent than anyone wants to admit,” say analysts at Rosenblatt Securities. The result of this attention from regulators is likely to be the loss of IOIs, say analysts. “Actionable IOIs will mostly disappear, not become exchange quotes,” Rosenblatt says. “The end of actionable IOIs will favour the biggest pools and discourage new ATSs from forming.”

The use of IOIs may be far more widespread than is admitted by operators of dark pools.The issue is clouded by the fact, that an actionable IOI which results in a trade, can be seen as differing from an IOI sent to unearth an interest in trading, but which does not result in a trade occuring.

The SEC focus on actionable IOIs crosses into the regulator’s other proposal, which will lower the amount of daily volume in a company’s shares that can be executed in dark pools before quotes are made public, to 0.25 per cent from 5 per cent currently.

Many of the largest dark pools and analysts have interpreted the SEC proposals as just governing dark pools which use actionable IOIs and which send them to more than one investor.

“The wording of the SEC’s proposals now defines an actionable IOI as a quote, and if a dark pool using IOIs breaks the threshold of 0.25 per cent, that price must be incorporated into the public market,” says Adam Sussman, head of research at TABB Group.

Dan Mathisson, managing director of Advanced Execution Services at Credit Suisse, which runs the largest US dark pool, agrees: “Credit Suisse’s CrossFinder is a true dark pool. We do not send IOIs and therefore the lower threshold will not affect us.”

That interpretation could limit the scope of the SEC’s proposed changes. With an average daily volume of about 140m shares, CrossFinder accounts for between 15 and 20 per cent of dark pool trading. Other large pools, such as those run by Goldman Sachs and electronic trading firm Getco, with about 120m and 100m respectively, say they do not use IOIs.

“The big question is what percentage of internalised dark pools’ matched volume comes from actionable IOIs,” says Mr Sussman. “If you publicly post the price, it defeats the purpose of being a dark pool and it seems dark pools will become darker.”

Others believe the SEC is targeting pools run by the big dealers, which use in-house systems to match customer orders. These are known as internalisation matching engines. “The SEC has clearly lined up against the internalisation matching engine of the dealers,” says Seth Merrin, chief executive officer at Liquidnet, an ATS which facilitates the block trading of shares between institutions.

Mr. Merrin said it appears that the SEC wants to move trading from internal engines at the major dealers out into the public market: “Clearly the brokers will lobby against the proposals.”

In response to the criticism of dark pools using and relying on prices quoted in publicly displayed markets, without contributing their own information, the SEC wants dark pools to report trades just after they occur and disclose venues that executed them.

Currently, dark pools and other alternative trading systems report their trades in the consolidated trade data that is made widely available to the public. However, the identity of the particular dark pool that executed the trade is not disclosed.

This is seen winding the clock back to a time, when large blocks of shares traded upstairs at the NYSE were reported and thus alerted floor traders to what was happening.

As the industry awaits further details from the SEC regarding their proposals, some think the larger dark pools may benefit.

“Dark pools will be tweaking their operations and once trades are posted, some may gain market share if investors see how much volume they are doing,” says Mr Sussman.

The SEC says the combined share of trading volume for dark pools during the second quarter of 2009, was approximately 7.2 per cent of total share volume. And this is growing. According to Rosenblatt Securities, August represented the third consecutive record month for the share of dark pools in overall trading.