The introduction of a ‘trade-at’ rule could halve trading volumes in US dark pools, according to New York agency brokerage Rosenblatt Securities.
Exchanges have been lobbying US regulator the Securities and Exchange Commission (SEC) to introduce a rule that would force equities transactions onto lit exchanges unless dark pools or internalising matching engines operated by brokers could prove meaningful price improvement had been achieved.
Similar rules have recently been introduced in the Australian and Canadian equities markets. Some market observers have speculated that a planned pilot scheme to reform tick sizes with the aim of boosting liquidity in small- and mid-cap stocks could be used to trial a trade-at rule.
Interest in tick size reform has increased since the Jumpstart Our Business Startups Act mandated pilots and a proposal from Citi specifically suggested that a scheme could create three categories for illiquid stocks, one of which would serve as a proxy for the trade-at rule.
A pilot scheme introducing a new tick size regime could come into force next year, but a trade-at rule could also be introduced on a standalone basis. SEC chair Mary Jo White has let it be know that she favours holistic rather than piecemeal reform of US equity market structure. She has also indicated that a tick size pilot would take place outside a wider structural overhaul.
In a note published last week – accompanying Rosenblatt’s monthly report on US dark pool trading volumes – the broker said that internationalisation of retail orders may continue unabated on grounds that retail brokers would still harbour concerns over the limited liability of exchanges for errors.
Rosenblatt believes that the 14% of US equity trading volume executed in dark pools – and reported in their monthly updates – would be potentially affected by a trade-at rule, but the firm points our that a significant proportion of those orders already comply “because they provide meaningful size or price improvement”.
The broker estimates that “as much as half” of current dark pool trading activity could move onto exchange, noting that this represents “a small fraction” of off-exchange volumes, which currently account for just over 35% of all US equity market trading.