01 October 2013

Reuters: US securities watchdog proposes new rules for dark pools

A US securities industry watchdog has proposed new rules to monitor transactions in "dark pools" run on alternative trading systems (ATSs), rivals to traditional exchanges whose growth critics blame for less transparency in the stock market.

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 determine better where to route their orders, said Tom Gira, head of market regulation at FINRA.

The heads of exchange operators NYSE Euronext, Nasdaq OMX Group, and BATS Global Markets met with the SEC in April to argue that the growth of off-exchange trading has creating wider trading spreads, more intraday volatility, and made the market more opaque. A spokeswoman for BATS said 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. Dark pool proponents 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.

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.

Under current regulations, dark pools have to disclose their volumes to a so-called 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 at 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.

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