Six Steps That Hedge Fund Managers Should Take to Protect Their Confidential Information When Using or Evaluating Dark Pools

The desire of hedge fund managers to zealously protect their confidential information can be at odds with the reality of the need to execute on their investment strategies, particularly when it comes to executing large trades.  As such, many hedge fund managers have begun directing trades (directly or indirectly through broker-dealers) through dark pools to protect important trading information, such as indications of interest on large trades, from misuse by other market participants.  Nonetheless, a recently settled enforcement action brought by the Securities and Exchange Commission demonstrates that hedge fund managers should be cautious about which dark pools are being used to execute their trades and how dark pool operators access and use fund and manager information.  This article summarizes the SEC’s order in the matter and provides six practical recommendations for hedge fund managers seeking to conduct due diligence (either directly or indirectly through broker-dealers) on the dark pool operators used to execute their trades.

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