Market cool on SEC’s real-time dark disclosure plan

The US Securities and Exchange Commission’s proposal to require real-time disclosure of non-displayed trading venues’ identities in the consolidated post-trade feed has received a frosty reception from market participants.
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The US Securities and Exchange Commission’s proposal to require real-time disclosure of non-displayed trading venues’ identities in the consolidated post-trade feed has received a frosty reception from market participants.

While dark alternative trading systems (ATSs) in the US must report trades to the consolidated tape in real time on a post-trade basis, current regulations do not force them to identify themselves on the feed.

“Real-time venue attribution of trades does not benefit long-term investors,” Owain Self, head of algorithmic trading for EMEA and the Americas at UBS, told “It creates more information leakage about what may be happening with people’s orders and it removes some of the benefits of dark ATSs.”

He added, “Most of our clients agree that they don’t want information to be disseminated that would allow others to determine what is happening with large institutional orders. We think it will favour the short-term traders.”

The proposal was one of three new dark pool disclosure rules put forward by the SEC in October. Market participants had until yesterday to comment on the SEC’s suggestions. The other two proposals comprised publishing actionable indications of interest (IOIs) as quotes in the pre-trade stream and lowering the threshold at which certain trading platforms must display bids and offers to 0.25% of a stock’s average daily volume from 5%. Venues impacted by the latter rule are ATSs that actively push bids and offers to market participants, as opposed to entirely dark venues that send no information to potential buyers and sellers.

The SEC also proposed an exemption to all three rules for block orders, which it suggested should be defined as those of $200,000 and above.

Although the SEC’s real-time venue disclosure proposal is intended to give market participants greater transparency, some feel it could cloud the issue further. Tim Mahoney, CEO of dark trading venue BIDS Trading, points out that because current rules permit some ATSs to restrict access, complete real-time disclosure could distort the picture by giving traders details of liquidity they could never have accessed. “What is the point of describing a venue and giving away information if no one has the ability to use it?” said Mahoney. “You are giving away valuable information that is not particularly going to help anybody.”

And while many dark trading venues are supportive of the SEC’s proposed block exemptions, these may impair market transparency when applied in conjunction with the real-time disclosure rule. A venue with half of its trading activity executed in sizes above the block exemption threshold and half below, for example, would be identified in the consolidated tape as having traded only half its true amount.

“There would be some potential confusion in the marketplace about who traded what liquidity and what is real liquidity,” said Mahoney.

There is also some controversy about the SEC’s proposed definition of a block trades. Mahoney says a simple share amount limit is preferable because a value limit would require a calculation based on two variables – the size of the order and the price of the shares.

However, Self at UBS argues that using any absolute quantity – either dollars or shares – to define a block is not necessarily appropriate for all stocks. “To make a definition that works consistently across all order types and all liquidities of stocks would be so complex that it would be inoperable – you wouldn’t be able to work out when you could use it and when you couldn’t,” he said. “Too crude a block definition is also a problem and it would be more or less impossible to make one sophisticated enough to help everybody.”

While operators of US dark pools acknowledge that there are some rough edges in the SEC’s proposals that need to be smoothed, most are supportive of the new rules in the main. “The SEC’s efforts to update the rules are very sensible,” said Alfred Berkeley, chairman of US block-trading venue Pipeline. “They are probably striking a good balance between the needs of retail clients and the needs of institutional clients.”

The SEC has not given a timetable for when the rules will be finalised. Its proposals on dark pool regulation are part of a series submitted for consultation last year to improve US equity market structure. Others include the proposed ban on ‘flash’ orders and the reinstatement of a modified uptick rule for short-selling, proposed last year. In January, the SEC issued a proposal to abolish sponsored access to trading venues without risk controls and a broad-ranging ‘concept release’ that invited comment on all aspects of the functioning of the US equity markets.