Mary Schapiro, chairman of the US Securities and Exchange Commission, has outlined the regulator’s proposals for reforming dark trading in a statement released before the SEC’s open meeting on ‘non-public trading interests’ this afternoon.
The proposals will be open to public comment for 90 days before any further action is taken.
The first proposal would require actionable indications of interest (IOIs) under $200,000 to be treated like all other quotes and subject to the same disclosure rules in order to prevent the creation of a two-tier market. Speaking at the meeting, Commissioner Troy A. Paredes also invited the market to comment on whether an exemption should be made for IOIs over a particular number of shares. Reg NMS defines a block order as one that is worth more than $200,000 or contains 10,000 or more shares.
IOIs are messages indicating a trading opportunity in a pool which are typically only sent out to a select group of participants rather than the entire market. The SEC defines actionable IOIs as those which contain enough information to permit others to trade.
Secondly, the SEC has proposed reducing the volume threshold applicable to alternative trading systems (ATSs) to 0.25% from 5%. Currently, if an ATS accounts for 5% or more of the volume in a particular stock, it must display its best-priced orders to the public.
The third proposal for discussion would require real-time disclosure of the identity of dark pools after they execute a trade, bringing reporting in line with registered exchanges. The identity of the dark pools is presently not disclosed.?“Although dark liquidity always has existed in one form or another in the equity markets, the Commission must assure that the public markets and non-public trading venues operate within a balanced regulatory framework,” said Schapiro, in a statement. “This means that as markets evolve, the Commission must continually seek to preserve the essential role of the public markets in promoting efficient price discovery and investor confidence.” According to the SEC, all of the propositions have the goal of increasing market transparency, although according to some market observers, renewed regulation around dark pools is not necessary.
“There is no evidence that dark pool volume should be curtailed…yet,” said Adam Sussman, director of research, TABB Group. “Although the percentage of matched share volume occurring in the dark has risen steadily during the past four years – from 1.5% in 2005 to nearly 12% today – the absence of data makes it difficult to analyse the effect dark trading has on their own trading, let alone the efficiency of the US equity markets.”
Schapiro also confirmed that the SEC is reviewing the rise of high-frequency electronic trading strategies, broker arrangements that allow customers direct access to the markets and exchange co-location services that provide speed advantages to customers in obtaining market data and executing trades.