Although its name suggests a logical extension to the traditional indication of interest, the ‘actionable IOI’ appears to have more in common with that ally of the high-frequency trader, the flash order. To an extent, the proposal by the Securities and Exchange Commission to limit the issuance of actionable IOIs by US non-displayed trading venues is the sibling of the SEC’s plan to outlaw flash orders. Indeed, the reforms were ‘born’ a matter of weeks apart.
On September 16, the SEC proposed closing the loophole in Rule 602 of Regulation NMS that allows flash orders, leaving the market 60 days to respond. Both Nasdaq and BATS dropped similar order types when it became apparent in August 2009 that the SEC was likely to take action, but fellow US trading venue Direct Edge did not voluntarily ban its flash functionality.
Barely a month later, the SEC proposed three changes aimed at increasing transparency in US dark pools: requiring ‘actionable’ IOIs to be published as quotes; lowering the level at which dark pools must make quotes public to 0.25% of a stock’s average daily traded volume from 5% (seen by many as a means of reducing use of IOIs by dark pools and non-displayed alternative trading systems (ATSs)); and forcing operators to report trading volumes individually on the consolidated tape. Market participants had 90 days to respond to the proposed ‘Regulation of Non-Public Trading Interest’, which exempted orders of US$200,000 or more from all three of the requirements.
The SEC proposal would alter the definition of bids and offers in Reg NMS to include actionable IOIs, thereby placing them on the national US pre-trade consolidated market data feed, making the information available to all market participants.
Many have been the objections and alternative suggestions to the planned reforms, a large proportion of which have aimed to protect block traders from the threat of pre-trade transparency.
For example, buy-side-focused crossing network Liquidnet’s submission of 26 March (the firm’s second) asserts that actionable IOIs have been with us since “the dawn of trading” and are currently used by a wide range of market participants, from block trading desks to floor brokers to principal trading desks.
Liquidnet and others have called for flexibility in the block exemption suggested by the SEC, for example allowing a block to be defined by number of shares or percentage of average daily volume in order to allow buy-side traders the ability to continue to trade less-liquid stocks in the dark.
In addition, some are concerned that the block exemption is conditional on the IOI “being communicated only to those who are reasonably believed to represent current contra-side trading interest of at least US$200,000”. Liquidnet oppose this condition on grounds that requiring the sending ATS or dark pool to explicitly communicate block size could be “disadvantageous” to the original sender.
The firm recommends instead that the order that underpins the actionable IOI should “be executed for block size if a block size order is received” in response to the actionable IOI. Liquidnet argues this modification would help to reduce market impact, offer price improvement on both sides and cut message traffic and latency.
Such compromises seem reasonable enough. But a time when anything to do with dark pools is viewed with suspicion and NYSE Euronext chief executive Duncan Niederauer is calling for pre-trade transparency reporting requirements for dark pools, little can be taken for granted.
Neither proposal has been finalised. But the SEC’s final ruling on flash orders could prove an accurate signpost for the future of actionable IOIs.
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