US dark pool transparency to drive key policy issues

A move to increase public reporting of dark pool volumes by US regulators could lead to greater understanding of the execution venues, which would inform key regulatory initiatives.

By None

A move to increase public reporting of dark pool volumes by US regulators could lead to greater understanding of the execution venues, which would inform key regulatory initiatives. 

While dark pools are key to many institutional investors’ trading strategies, an absence of standardised trading data has helped to fuel negative perceptions of off-exchange trading and limited the ability of watchdogs to craft a sustainable regulatory framework.

Earlier this month, industry-funded watchdog the Financial Industry Regulatory Authority (FINRA) put forward rules it will file with the Securities and Exchange Commission (SEC) to require alternative trading systems (ATSs) to report volume information to FINRA.

“Specifically, the rules would require ATSs to report aggregate volume information, by security, to FINRA on a weekly basis, and FINRA will disseminate the reported information on its website,” the authority said in a statement.

This means all market participants could see how much trading occurred off-exchange overall, and how much for specific securities.

Speaking to, Frank Troise, global head of electronic client solutions for J.P. Morgan, said FINRA’s proposed dark pool transparency rules would benefit the wider market. He said it would bring the US in step with other jurisdictions, such as Hong Kong, that publishes dark pool trading volumes monthly.

“The mandated reporting of dark pool volumes should have a positive effect on the market,” Troise said. “We would get a regulatory reported, accurate view of off-exchange ATS volumes.” 

Overall, Troise believes market participants have become more educated about dark pools and said greater reporting requirements would accelerate the trend from a volume-based understanding of dark pools to a focus on execution quality.

Presently, there is no public reporting of dark pool trading volumes. Off-exchange trading accounts for roughly 30-40% of total US equity trading, on most estimates, but dark pool volumes are much lower, accounting for 12-13%.

Financial consultancy TABB Group and US agency broker Rosenblatt Securities currently compile and publish dark pool volume data based on information received directly from participating ATSs. However, Troise said many dark pool operators – including J.P. Morgan – do not submit their figures, citing a lack of regulatory oversight in the process.

Instead, the FINRA solution would guarantee the data is processed with sufficient accountability measures in place, which would lead to a greater understanding of dark pools’ role in the equity market to help formulate future regulation.

“Accurate dark pool volume data would foster a more relevant and informed discussion about key issues facing US equity markets, such as a ‘trade-at’ rule and the implementation of a pilot program for nickel spreads,” Troise said.

The ‘trade-at’ rule would mean trades could only be executed in dark pools if a minimum price improvement could be achieved. The SEC has said it will likely review Reg NMS in the near future, which could include the development of such a rule, although experts have suggested reform would benefit exchange operators, not end-investors.

Rick Ketchum, chairman and CEO of FINRA, said in a video published on the Authority’s website that reporting the dark pool data would be delayed a week to avoid adverse market impact. He said ATSs would be required to use unique market participant identifiers, which would lead to a greater level of understanding of how dark pools operate.

“These rules will greatly increase information about ATS trading generally and particularly about dark pool trading – something that has raised significant concern to investors trying to understand [how it works] and with respect to the amount of activity that occurs [within dark pools],” Ketchum said.