When Dimitri Sogoloff takes the plunge into "dark pools" of liquidity, he doesn’t always emerge refreshed. Sogoloff, chief executive of New York–based quantitative hedge fund firm Horton Point, says he’s come away more than once feeling a little sullied.
In search of lower trading costs, Horton Point managers sometimes tap dark pools, increasingly popular off-exchange electronic trading venues where buyers and sellers can fill large orders anonymously. These pools account for a significant amount of total equity trading. TABB Group, a Westborough, Massachusetts–based financial research and advisory firm, estimates that dark liquidity captures about 10 percent of average daily volume in the U.S. More than 40 dark pools trade in the U.S., and more than 60 worldwide. Trading by hedge funds make up a modest 8 percent of total dark pool activity, according to TABB, which notes that this year dark liquidity is grabbing less market share...