US dark pools set for transparency overhaul

SEC approves amendment which will require dark operators to disclose information for greater transparency and regulatory oversight.

The US financial watchdog has voted to adopt new rules for equities dark pool operators which will significantly increase transparency and oversight of how they operate.

A statement from the Securities and Exchange Commission (SEC) explained the rules, which apply to dark pools trading stocks and shares off-exchange, will require dark pool operators to disclose information on its broker-dealer activities so that market participants can understand how orders interact, match and execute.

Dark pools, also known as alternative trading systems (ATSs), have been the subject of mass controversy and debate in recent years, with financial regulators worldwide looking to clamp down on failures and potential manipulation by banks across the venues.

Major financial institutions have been handed record fines for mismanagement of dark pools. Deutsche Bank was ordered to pay a $37 million by the SEC following misstatements and omissions related to the marketing of its dark pool equities order router.

Credit Suisse and Barclays also settled similar investigations by the SEC into their dark pools by agreeing to pay a combined $154.3 million in fines. Both investment banks admitted to making false statements in connections with the marketing of their dark pools and other electronic trading services.

Industry concerns around dark pools, including a lack of transparency on where orders are routed, information leakage and potential internal broker preferencing, remain concerns for many market participants today.

Brokers operating dark pools in the US will have to use a public filing, Form ATS-N, to disclose the required information on their management and clients as of January 2019, the SEC said.

“I applaud the staff’s retrospective review of our regulation of ATSs,” said SEC chairman Jay Clayton. “I agree that promoting greater transparency in order interaction, matching, and execution will help empower investors and their intermediaries to find those trading venues that best meet their trading and investing objectives.”