Proposed dark reporting may yield buy-side benefit

A proposed US dark pool reporting regime would replace the informal, voluntary process currently used to measure off-exchange execution and could lead to improved execution for the buy-side.

A proposed US dark pool reporting regime would replace the informal, voluntary process currently used to measure off-exchange execution and could lead to improved execution for the buy-side.

On Monday, the Financial Industry Regulatory Authority (FINRA) submitted to the Securities and Exchange Commission (SEC) a proposal calling for alternative trading systems (ATSs) to report weekly volume information and the number of trades with a unique participant identifier, data FINRA would make publicly available on its website.

For liquid stocks, this would be delayed two weeks, and slightly longer for less liquid stocks, to avoid information leakage.

In the proposal, FINRA asserted the unique identifier would give it and the SEC greater ability to monitor ATS compliance with current regulation that stipulates such venues must report price and size of trades in a certain security if it passes a specific threshold. Currently, regulators cannot see from which venue reported trades were executed in if the market operator runs more than one ATS.

“The proposed rule change will enhance FINRA’s regulatory and automated surveillance efforts by enabling it to obtain more granular information regarding activity conducted on or through individual ATSs,” FINRA’s proposal to the SEC read. “The proposed rule change will also enhance transparency into the over-the-counter market.”

Although the 91 ATSs registered with the SEC do not include all dark pools (single dealer platforms, for instance, fall outside the ATS definition), the increased reporting requirements would provide the market with a greater view of the growing segment of equities executed off-exchange.

Justin Schack, managing director and partner for agency broker Rosenblatt Securities, who heads the market structure analysis group, said FINRA’s proposed rules would give greater clarity to the increasing level of dark trading – which in August reached 38% of US equity trading.

Schack said this may only provide a minor benefit to participants as many can already discern dark activity through the consolidated tape, but for the buy-side, firms would have a greater ability to see where brokers route their orders.

“Under FINRA’s proposal, buy-side firms would have greater ability to see what sort of activity occurs in certain venues, or groups of venues,” Schack told “If you look at the data over a long period of time, patterns may form that help the buy side analyse which venues to prioritise for certain orders, which could lead to improved execution results.”

He added asset managers would be able to see if certain pools had a concentration of trading in a specific group of names, of sectors, and also what level of high-frequency trading occurred in dark pools.

For six years, Rosenblatt has acted as a hub for voluntary industry reporting of dark trading figures alongside consultancy TABB Group. In April, however, top US dark pool by volume traded Crossfinder, run by Credit Suisse, declared it would no longer submit figures to Rosenblatt or Tabb, increasing opacity in dark execution.

Schack said FINRA’s renewed vigour to increase reporting requirements was linked to the industry move to switch from voluntary reporting to mandated reporting, but also to a wider desire for transparency from regulators.

“I don’t think there’s much appetite among regulators or legislators for a wholesale revamp of our market structure, including big changes in dark-pool rules. But there is a general concern over rising levels of dark, off-exchange trading and a feeling that more detailed post-trade transparency is good for the industry,” Schack said.

If the SEC gives the green light, FINRA will publish a regulatory notice no later than 30 days following Commission approval. The effective date for the ATS reporting requirement would be no later than three months from this notice.