Goldman Sachs’ calls for US dark pools to adopt a standard system for publishing trade volumes has been met with a lukewarm response from some independent crossing networks.
In a letter to clients last week, Goldman proposed that all dark pools, both brokers’ internal matching engines and independent crossing systems, publish their volumes on a single-counted, matched-only basis. It also stated that, starting from June, it would publish trades executed in SIGMA X, its US dark pool, on that basis.
While all dark pool trades are published to the US’s national consolidated tape, they are simply identified as over-the-counter trades and the tape does not record which venues they were executed in. This leaves pools to self-report their individual volumes to clients, should they wish. But not all pools use the same methods, which confuses clients, Goldman argues.
Goldman’s proposals follow comments from the US Securities and Exchange Commission (SEC) about the lack of consistency in dark pools’ post-trade reporting methods. The regulator’s concerns were expressed in speeches by James Brigagliano, co-acting director, division of trading and markets at the SEC, and chairman Mary Schapiro on 20 May and 18 June respectively.
But some independent pools, which tend to report both sides of a trade separately – known as double-counting – argue that there is already a standard. Tim Mahoney, CEO of US equities block trading facility BIDS, says his platform double-counts all matched trades to follow practices established by its peer group, which includes Liquidnet and Pipeline. Mahoney told theTRADEnews.com, “I believe we have consistency now because we all report in the same way.”
He added that double-counting makes sense because dark pools such as BIDS earn commission on both sides of the trade. Others argue that it is clear to market participants that dark pools are double-counting matched trades. “We are trying to be as transparent as possible: we make it very clear on our website that advertised volumes are double-counted and all trades are matched,” said Eric Soderberg, senior vice president of corporate marketing at trading technology firm NYFIX, which operates the Millennium dark pool in the US.
Mahoney added, however, that if a new industry standard did emerge, BIDS would adopt it. Soderberg agreed. “We would support and adapt to a standard for the reporting of trade volumes as long as doing so did not compromise the anonymity of client orders,” he said.
The SEC seems to be urging the industry to come up with its own standard or run the risk of potentially debilitating regulation. Cheyenne Morgan, analyst at research and consulting firm TABB Group, praised Goldman’s initiative as a step in the right direction, and expects other pools to follow suit. “When people see the SEC looking into things like this, it is better to be a first mover than wait for the SEC to take action,” she said.
Greg Tusar, head of Goldman Sachs Electronic Trading, North America, told theTRADEnews.com that dark pool operators should be able to develop their own standard without the SEC stepping in. “Regulatory intervention is not necessarily unwelcome, but it is not something we need to wait for,” he said.
Tusar acknowledged sensitivity to change among smaller pools. “Some may have not wanted to be first movers because they were concerned that once they made the change, their pools would look small compared with the rest,” he said.
Tusar added, however, that the apparent changes in volumes that would result from a shift to single-counting could be easily explained to clients.
The SEC has also expressed disquiet about dark pools’ use of indications of interest (IOIs) to advertise available liquidity. IOIs are functionally similar to quotes disseminated by displayed markets, yet exclude those who are not party to the IOIs, creating private markets.
“These private markets could wind up representing a significant volume of trading based on valuable information on actionable orders to which the public does not have fair access,” Schapiro said in her 18 June speech.
However, even those pools that do not disseminate IOIs acknowledge that they have a role in the market. “If your priority is price improvement and you are not concerned about information leakage, the system of broadcasting IOIs is a legitimate approach,” said Mahoney at BIDS. But he added, “What is important is that clients know what is happening.”