Where did dark pools come from: Instinet, Reg NMS and MiFID?

Dark pools grew out of a simple wish: to trade big blocks of shares without the whole world watching. The story begins in 1969 with Instinet, whose computer network went live that December and offered the automated buying and selling of shares on an anonymous, confidential basis. Its founders wanted to compete with the New York Stock Exchange through computer links between big institutions, with no delays and no specialists in the middle.

The idea proved its worth in a panic. During the Crash of 1987, an electronic system kept trading when brokers and market makers were unwilling to answer their phones. By then regulation had made room for it: in 1979 the United States let securities listed on an exchange be traded off that exchange, and in 1986 Instinet started what is described as the first dark pool venue, After Hours Cross. The next year ITG launched POSIT, the first intraday one.

The late 1990s gave these venues rules. After a study found that NASDAQ spreads were larger than statistically likely, an antitrust lawsuit followed, and NASDAQ's settlement integrated electronic networks into its system. Soon after, the SEC adopted Regulation ATS in 1998, which let such networks register as exchanges or be regulated as alternative trading systems.

Then came Regulation NMS in 2005, a US rule meant to assure investors the best price executions by encouraging competition between venues. Venues multiplied. By 2012, 40% of equity trading volume was taking place in dark pools and internalizers. Europe followed its own path: MiFID 1, which took effect in November 2007, abolished the rule that let countries force client orders onto regulated markets and opened the way for alternative venues. MiFID 2, in force from 3 January 2018, then capped dark trading so that it would not harm price formation.