A quickly growing and secretive trading tool used by the top Wall Street investment banks and hedge funds could become Wall Street’s next big problem.

Dark pools of liquidity, or virtual trading arenas off limits to normal investors, are where large-volume investors like hedge funds and mutual funds can quickly move large blocks of stock. These pools have grown in popularity since 2003 – reaching a point where analysts estimate more than 10% of all stock trades are now being done inside them.

The New York Stock Exchange, investment banks and other market players claim dark pools are a useful way for Wall Street to move large blocks of stock quickly and cheaply.

But some are a bit more wary of these growing pools, saying that the dark pools have created a two-tiered system where big players can move stock, while retail investors are left, well, in the dark.

“It all comes down to transparency and accountability and there is no transparency in a dark pool, there is no accountability,” said Dave Henderson, a floor trader on the New York Stock Exchange. “I wish they weren’t around.”

Wall Street has always had a tendency for innovation before regulation. Financial instruments like hedge funds, mortgage-backed securities or collateralized debt obligations were created long before the government could regulate them.

Now add dark pools to that list.

Dark pools were born out of necessity as major market players needed to buy or sell stock throughout the decades. It’s still common practice to give a large order to a New York Stock Exchange floor trader or a broker to allow them to “work” that order.

A 100,000-share order would be broken into smaller pieces that would be easier for the market to handle.

“You would never just announce to fellow traders, ‘Hey, I want to buy 100,000 shares of X company,’” said Charles Whitehead, a professor in securities law at Boston University and a former executive at Citigroup (C). “That would make the stock’s price go through the roof.”

Instead, the stock’s order would be worked “in the dark.”

Dark pools were never a major issue for the floor traders of the NYSE until decimalization in August 2000, traders and financial experts said.

Before decimalization, stocks were traded in fractions, where a stock such as General Electric (GE) would be quoted at 15 3/4 or 16 5/8. That provided what’s known as a “spread” for traders to work – which made selling a block of stock easier because there were fewer agreed-upon price points to enter or exist a stock.

Now with decimalization, stocks sell in pennies or fractions of a penny so stocks trade in statistically smaller chunks than they used to. The Tabb Group, a Wall Street research company, estimates that the average trading block on the floor of the New York Stock Exchange has fallen to 250 shares compared with 1,000 shares seven years ago.

“These statistically smaller trading blocks of stock have made it harder for traders to move bigger blocks of stock more time consuming and more expensive,” said Larry Tabb, chief executive of the Tabb Group.

Enter dark pools.

Now what used to be a several hour process can be done immediately and with dizzying efficiency through dark pools – large blocks of stock can move from buyer to sellers without even the market knowing they traded until at least 90 seconds later.

Dark Pools Surge in Popularity

The problem with some investors and market researchers is the process has gotten too big, too fast. The number of dark pools has grown from seven in 2003 to 42 pools this year, according to the Tabb Group.

Some of the biggest names on Wall Street now play in the dark pool business. Goldman Sachs (GS) has its Sigma X pool, while Morgan Stanley (MS) announced its Night Owl pool only a month ago.

And those investment banks are now beginning to work together with their dark pools. Goldman Sachs, Morgan Stanley and UBS (UBS) now allow their customers to dip into each other’s dark pools as well.

Dark pools do serve a useful purchase. Fund managers with retirement fund management giants such as Fidelity, Vanguard and Prudential (PRU) are said to use dark pools regularly to help them buy and sell stock.

One major fund manager with more than $100 billion under management said he regularly uses dark pools for his clients. He declined to be identified because of the sensitive nature that comes with trading strategies.

“I want to get my big trades done quickly as possible without having to move around too much,” the fund manager said.

Because this fund manager and others like him are able to trade via dark pools, they avoid paying the NYSE and the Nasdaq Stock Market commissions on their orders.

But like many things on Wall Street, dark pools are usually available only to the super wealthy or large-scale mutual funds. If Joe and Joan Smith in Missouri want to trade their 1,000 or even 10,000 shares of GE or AT&T (T), they will have to work that order on the floor of the NYSE – costing them more money in commissions than the mutual funds.

Officials within the Securities and Exchange Commission have even expressed concern about the “clubhouse” nature that dark pools have created.

Erik Sirri, the SEC’s director of market regulation, said in a speech in February that  the unfair access to dark pools could raise “serious concerns about two-tiered markets” that could disadvantage small-time investors.

NYSE officials aren’t as worried. The iconic stock exchange announced a partnership with BIDS, a dark pool trading platform, in order to regain market share from the investment banks and other dark pools.

“We want to link the non-displayed and displayed markets in a real efficient way so people can trade large blocks of stock again,” said Tim Mahoney, CEO of BIDS.

While dark pools allow big market players to quickly buy and sell stock, Boston University’s Whitehead and other industry observers said the removal of the market movers from the NYSE and Nasdaq removes key pricing information from any stock that trades inside a dark pool.

“There are legitimate concerns that come from dark pools when that amount of trades is being done in the dark,” Whitehead said. “It creates a lack of transparency that could impact the market price that the broader public market and in the end, retail investors as well.”

And dark pools are only expected to keep growing as demand for large-block trades continue to remain.

According to the Tabb Group, upwards of 10% of the NYSE’s and Nasdaq’s daily volume is now being done in the dark. That percentage is expected to grow to 15% or maybe as high as 25% in 10 years.

“I really do think that someone needs to take a look at it,” Whitehead said. “The brokerage houses are heavily regulated, the exchanges are heavily regulated, but dark pools are not. When you’re dealing with 10% of the volume being traded in these pools, that matters.”

SEC officials told FOX Business that dark pools are not directly regulated like the exchanges, and they don’t believe that will change any time soon.

However, the major fund manager said he isn’t worried about dark pools eventually dominating the markets.

“The people who have access to dark pools, if they need the immediacy of buying or selling vast amounts of stock will always go directly to the stock markets,” he said. “Dark pools cannot replace that at this point.”