US securities watchdog proposes rules to monitor trades in dark pools
Move hailed as a step in direction of stock market transparency
A US securities industry watchdog has proposed new rules to monitor transactions in “dark pools” run on alternative trading systems (ATSs).
Critics blame the growth of these rivals to traditional exchanges for less transparency in the stock market.
More than a third of US stocks are now traded through dark pools, most of which are run by banks and brokers and often have lower fees than exchanges.
Originally aimed at minimising the market impact of large institutional orders, dark pools now have average trade sizes in line with those on public exchanges.
ATSs would be required to report weekly volume and the number of trades for each security under the rule proposal the Financial Industry Regulatory Authority (Finra) filed on September 30 with the US Securities and Exchange Commission.
Investors could use the information to better determine where to route their orders, said Tom Gira, head of market regulation at Finra.
In April, Credit Suisse stopped disclosing the amount of trading volume on its Crossfinder platform, the world’s largest dark pool. This raised concerns about the transparency of US equities markets.
A spokesman for Credit Suisse was not available for comment on Tuesday.
“The more good information about the way the market works that we can put in the public domain, the better, given some of the lack of understanding out there,” said Jamie Selway, managing director at Investment Technology Group, which runs a dark pool and voluntarily discloses its volume.
The heads of exchange operators NYSE Euronext, Nasdaq OMX and BATS Global Markets met with the SEC in April to argue the growth of off-exchange trading has created wider trading spreads and more intraday volatility and made the market more opaque.
A spokeswoman for BATS said on Tuesday the exchange supports Finra’s efforts “to try to bring an appropriate level of transparency to trading that happens away from the lit exchanges”. NYSE and Nasdaq declined to comment.
Proponents of dark pools say the competition the venues provide has kept trading prices on exchanges in line, and that if dark pools did not exist, trading prices would likely be much higher.
There were 91 ATSs registered with the SEC on August 1, trading in various asset classes. There are also dark pools that are not ATSs, such as wholesalers and single-dealer platforms.
ATSs bring together buyers and sellers of securities. Wholesalers are market-making firms that seek out retail firms and offer them trading guarantees and price improvement; and single-dealer platforms are venues where one side of the trade is always the dealer that owns the facility.
Many firms own more than one ATS and might also have a market-making unit and a single-dealer platform.
Under existing regulations, dark pools have to disclose their volumes to a trade reporting facility, which combines the data, giving an idea of the amount of trading happening away from exchanges. Last month, that amount was 38 per cent. But the data does not show which firms the trades were attributed to, or what types of dark pools were most used.
Under the new system, firms would have to use a unique identifier for each ATS when reporting trades. Finra would publish on its website the stocks traded on each ATS and the volumes, giving market participants a better idea of what is being traded and where. Because trading information can be sensitive, the data would be available on a delayed basis.
“It’s a step in the right direction to improving the transparency for the trade reporting facility,” said Sayena Mostowfi, a senior analyst at research firm Tabb.
Some of the largest US dark pools are run by banks that are also some of the exchanges’ largest customers. Other dark pools include Morgan Stanley’s MS Pool and Citigroup’s Citi Match.
Finra has proposed that professional users of the data generated by the ATSs would pay a fee to help recover the authority’s costs, while non-professionals could access the data for free.