Dark Pools Open To Regulation, Deny Price Distortion Charges
By Jacob Bunge, Of DOW JONES NEWSWIRES
CHICAGO -(Dow Jones)- Dark-pool operators are prepared for stricter reporting requirements as the Securities and Exchange Commission takes a closer look into the private, electronic-trading venues, with the aim of boosting transparency.
But executives of alternative trading systems vehemently deny charges that the rise of off-exchange trading makes displayed stock prices less legitimate and undermines investors' confidence in the market.
"What the dark pools represent is a very small piece of the overall market," said Seth Merrin, founder and chief executive of Liquidnet, an alternative trading system. "This should not be the top of [the SEC's] concern list."
So-called dark pools, private venues where big stock orders trade anonymously, in May accounted for nearly 9% of all U.S. equity trading, according to the research firm Aite Group LLC, with other private block-trading venues representing about 5%.
As equities trading platforms introduce new order types that route trades through dark pools before they're sent to the public market, the alternative trading venues have drawn both market share and criticism from incumbent exchanges like NYSE Euronext (NYX), which has called for regulators to investigate dark pools' role in the U.S. market structure.
The SEC is considering rules that would require the dark pools to standardize the way they report volume and specify the origin of trades coming out of the venues. But critics want authorities to go further, alleging that as more trading activity takes place on private venues, exchanges' stock prices will no longer accurately reflect the market.
"I really disagree with that," said Whit Conary, president of LeveL ATS, a dark-pool operator.
Conary says that dark pools simply automate a trading practice that's been around for years - brokers checking their in-house book before sending trades out to exchanges - and that alternative trading systems are used as a tool to augment on-exchange trading, which will always be around.
Dark pools let traders execute big stock orders more cheaply, because anonymity prevents other investors from moving against the trade, and there are no exchange fees attached.
Liquidnet's Merrin, who said he has discussed the topic with SEC officials, noted dark pools' U.S. market share relative to the three-quarters claimed by NYSE Euronext, Nasdaq OMX (NDAQ), BATS Exchange and Direct Edge.
"You don't want the 10% tail wagging the dog," he said.
Larry Leibowitz, head of U.S. execution and global technology for NYSE Euronext and a proponent of dark-pool regulation, acknowledged that dark pools' role in most stock movements isn't destructive to the market. "But if one name is highly traded [off-exchange], it could be," he said.
While SEC officials have acknowledged the price distortion concern, the agency is considering more immediate measures that would tighten reporting requirements.
Currently, many dark-pool operators double-count trading activity, including the number of shares matched for both buyers and sellers. That's because they operate on the broker-dealer model, according to Conary. "We're putting two customers together, so you count both sides of the trade," he said.
Nevertheless, operators say they won't put up a fight if the SEC wants all dark pools to report volume as exchanges do, counting only the number of executed shares.
"We're agnostic," said Tim Mahoney, chief executive of BIDS Trading, another alternative trading system. "They're both perfectly legitimate and I agree with standardization between exchanges and ATSs."
Mahoney said he also has no issue with another rule being considered by the SEC, requiring dark pools to identify which orders came out of their platforms.
"If people want to know how much volume you did, I don't think anybody's hiding that," said Mahoney. "There's not going to be a lot of resistance if that's deemed to be an important factor." |
