Swimming in the Dark

I was first introduced to Dark Pools a few years ago when visiting the NYSE. Even then they had SEC investigation written all over them. Well, it now seems the SEC has finally begun to take an interest.

 Dark pools are private networks where security transactions take place normally involving large institutional clients seeking liquidity for large quantities of stock. They are not public and prices are not part of the NBBO list.  Pipeline, a company which operated a private network like this is currently in hot water with the SEC. Milstream, a company they used to help fill orders, did things such as this... 

For the affiliate, the combination of technology, its ties with Pipeline and a feel for the market, developed through constant trading against Pipeline clients and via sophisticated techniques like flashing, allowed Milstream to get better at gauging and filling Pipeline clients' orders. Once it judged that an order for a given stock was to buy, Milstream commonly would purchase shares of the stock on another market, then turn around and use these to fill the client's order, the SEC and people familiar with the operation said.

 <em>Pipeline was allowing their affiliate to front run their clients without the client's knowledge</em>. Ironic, considering many large clients use dark pools and internalization specifically to avoid front running by <abbr title="high frequency trading firms">HFTs</abbr>. I personally see little wrong with the premise of dark pools, but I find the example of Pipeline to be a bit disconcerting. What do you think? Should dark pools be considered caveat emptor for those who use them? In a larger sense, could dark pools eventually break American's flimsy trust in the markets?