FINRA dark reporting plan approved but concerns remain

Mandatory alternative trading system reporting will begin in April after a Financial Industry Regulatory Authority plan gained approval despite the US regulator making no changes suggested by the industry.

Mandatory alternative trading system (ATS) reporting will begin in April after a Financial Industry Regulatory Authority (FINRA) plan gained approval despite the US regulator making no changes suggested by the industry.

The Securities and Exchange Commission (SEC) has approved the plan, which will require ATSs to report weekly volume data on a security by security basis to FINRA, which will in turn publish the data on its website with a two-week delay for liquid instruments and four-week delay for less-liquid securities. ATSs will also be required to adopt market participant identifiers (MPIDs) for all FINRA reporting.

FINRA will work with the industry to finalise the way firms report, which will begin no later than 24 April, while the MPID requirement will be implemented sometime before November. However, FINRA has made no changes to the rules despite ten industry participants raising concerns during a consultation process.

Jim Toes, president and CEO of sell-side trade body the Securities Traders Association, who submitted a comment letter to the SEC on the FINRA plan, said his organisation backed the initiative, but maintained reservations around key details.

“Overall we’re very supportive of more transparency in the market which this promotes, but we still have some concerns around the need to bifurcate the reporting process, which may complicate the process and lead to potential information leakage issues for illiquid securities,” he told

“The Street is working on so many compliance issues right now – from the Volcker rule to limit up-limit down – that we believe ATS reporting should be as simple as possible for market participants to deal with,” Toes said.

Fee issue

In a statement responding to industry comment letters that accompanied the revised filing on 15 January, FINRA said it would work with firms to develop a standard reporting format.

Under the scheme, FINRA will offer data for free on its website, but aims to charge for professional use. Seven of 10 comment letters from industry participants questioned the validity of such a fee and FINRA has responded by saying it will address issues relating to the fee in a separate regulatory filing.

Overall, there is widespread industry support for greater ATS transparency, which will be of particular benefit to asset managers.

“This will give the buy-side more data from which to judge sell-side order routing practices by showing execution volumes of all ATSs,” Joe Gawronski, president and COO of Rosenblatt Securities, which produces monthly reports on US dark pool volumes, told

“It does not break down the complex order routing process that characterises our markets today, but it will help asset managers by providing symbol by symbol execution data that can be used as one check on broker order outing practices,” he said.

FINRA initially drew up plans for the scheme after a major dark pool last year pulled its support from informal reporting through Rosenblatt and consultancy TABB Group, which also produced estimated dark pool volume reports.

Gawronski said FINRA should look to extend the universe of reporting venues beyond ATSs as pools operated by brokers acting as a single market maker and key internal pools operated by wholesalers are not required to report, although they facilitate execution away from exchanges.

“Expansion to non-displayed, off-exchange venues that are not registered ATSs, but which function similarly or are used in a like manner by market participants would further increase transparency around dark trading, to the advantage of the market as a whole,” Gawronski said.

Gawronski added Rosenblatt would benefit from having a more complete data set of ATSs volumes for its dark pool reports.

Testing powers

The SEC will also provide greater transparency of the US equities market through greater use of data monitoring tools, it’s chair, Mary Jo White, said in a speech last week.

Speaking at a Securities Regulation Institute event, White said the use of new SEC data tools would empower the Commission to better police negative trading behavior and form new rules.

The National Exam Analytics Tool (NEAT), developed by the Commission’s Quantitative Analytics Unit, surveys large blocks of trading data faster than the SEC has ever done in the past. A recent exam analysed 17 million transactions over 36 hours, White said.

Another SEC tool, the Market Information Data Analytics System, or MIDAS, which came online last year, will also boost transparency and currently collects one billion data points of trading information daily, time stamped to the microsecond.

In coming weeks, the SEC will produce analysis of off-exchange trading, high-frequency activity and depth-of-book liquidity, based on data compiled by the MIDAS system.

“In this rapidly changing environment, we must stay on stop of advances in technology,” White said. “NEAT and MIDAS are important tools that will help us keep pace with evolving technology.”