Spurred on by lawmakers, the Securities and Exchange Commission is trying to shed some light on those anonymous trading platforms known as dark pools. The move, which Wall Street has vociferously opposed, threatens to curtail certain practices that enable traders to obscure their identities and also hide transactions from their competitors.

Dark pools allow traders, especially of large blocks of stock, to hide their intentions and avoid moving share prices. Since the dark-pool information is not public, there are concerns that the banks and their biggest clients may be profiting from the information while other investors are denied it.

The SEC issued three proposals for public comment as part of a push to ensure market structures are not giving some players an unfair advantage. The proposals follow on its recommendation last month to ban "flash orders," which enable a few traders to see orders a fraction of a second before the public can trade on such information.

Sen. Chuck Schumer, D-N.Y., and Sen. Edward Kaufman, D-Del., have urged a crackdown on practices they say create an unfair advantage for the largest investors. They worry that dark pools create a two-tiered market, depriving investors of information and that flash trading distorts markets.

SEC Chairwoman Mary Schapiro says the agency is focusing on "those dark pools that transmit electronic messages to a limited group of market participants," typically through indications of interest, or IOIs. IOIs seek to inform other traders about interest in buying or selling securities. Some IOIs may include such details as the stock symbol, order size and price that make them resemble the exchanges' displayed orders.

The first part of the SEC's proposal would treat the more detailed IOIs like other quotes and subject them to the same disclosure rules. The proposal would exempt IOIs representing orders of $200,000 or more in value if the matching venue can demonstrate it is sending the IOIs to potential counterparties interested in trading orders of at least that size. Some observers feel this is an arbitrary number and will likely change after the commission receives comments.

The exemptions would let institutional investors seek bids without moving the market. Firms specializing in large orders account for 8% of all dark-pool trading in the U.S., according to data compiled by Aite Group LLC, a financial-services consultant in Boston. The second rule would lower the threshold over which an alternative trading system must publicly display its best price -- from 5% of the stock's trading volume to 0.25%. "Taken together, these changes would help make the information conveyed by actionable IOIs available in the quotation data that is widely disseminated to the public," Schapiro says.

It is, however, the most contested proposal. Now, if traders hit the 5% threshold, they stop trading. A threshold of 0.25% would come so quickly the trader would have to display the quote. "A 0.25% threshold is low and potentially disruptive to well-established dark pools," says Harrell Smith, head of product strategy at Portware LLC, which develops automated trading software. He adds that such a low threshold will trigger significant commentary and pushback by all interested parties. "In a less liquid stock, the threshold will be reached quickly and trading will have to be shut off." Others say the SEC threshold may push smaller orders out of dark pools and onto exchanges.

Finally, the SEC is considering requiring the same level of post-trade transparency between dark pools and what the exchanges already face -- real-time disclosure of the identity of the dark pool that executed the trade. This is expected to have a more negligible impact. Currently, dark pools must report their trades to the consolidated tape, but their identity is not disclosed. Smith says the amount of time the firms have to report means the rule wont have a measurable impact on trading systems trying to sniff out activity.

The largest dark pools are sponsored by big securities firms such as Goldman Sachs Group Inc. and Credit Suisse Group to execute their customer orders. Goldman argued in a statement that dark pools reduce costs and benefit small investors by letting mutual funds buy and sell securities in private. "Institutional investors can improve their trading performance by executing in an anonymous manner that diminishes their footprint," Goldman Sachs said. "In doing so, the clients of these institutional investors, for example mutual funds and pension funds where the bulk of small investors have their money invested, are direct beneficiaries.

After a 90-day comment period, the commission must vote to adopt the proposals before they become rules.

Donna Block covers accounting and securities regulation for The Deal.