A proposal requiring dark pools classed as alternative trading systems (ATSs) to report volumes would not provide adequate transparency to the market due to the unknown amount of dark trading that takes place on exchanges.
Self-regulatory body for US equity exchanges, the Financial Industry Regulatory Authority (FINRA), last month submitted to the Securities Exchange Commission (SEC) a proposal that would make dark pools report trading volumes to drive greater transparency in dark trading.
But, one securities market expert has suggested altering an existing rule formed under the SEC’s Regulation National Market System (Reg NMS), known as Rule 605, that requires US exchanges to report volumes to FINRA, would lessen the reporting burden on ATSs and provide more accurate dark trading data.
Speaking at a conference run by the Securities Industry and Financial Markets Association (SIFMA) on Thursday, David Weisberger, executive principal of investment management technology firm Two Sigma Securities, said the absence of on-exchange dark activity in FINRA’s proposed rules would limit their effectiveness.
“It seems to me very obvious to extend rule 605 rather than have FINRA [instate its proposed rules].
“If we did it this way you would be able to see more. The things we can’t see under any proposals is what the percentage of liquidity executed in the dark on exchange is,” he said, adding that current estimates registered on-exchange dark trading at between 8-11% of exchange trading.
He added the proliferation of order routing by exchanges themselves had added complexity to the market, which would not be reflected in FINRA’s proposals.
“All the exchanges have routers now and those routers often do different things with that order flow,” Weisberger said. “There’s a lot of nuance to this business and it seems one set of reporting would be better than multiple sets of reporting.”
Informal, voluntary dark pool reporting through consultancy TABB Group and brokerage Rosenblatt Securities had provided a fairly accurate mechanism to show the extend of dark activity occurring on ATSs. Recently, however, leading dark ATSs have decided not to share their trading volumes, which experts have suggested was a driver behind FINRA’s decision to develop mandatory reporting.