U.S. securities watchdog proposes new rules for "dark pools"


By John McCrank

NEW YORK, Oct 1 (Reuters) - A U.S. securities industrywatchdog has proposed new rules to monitor transactions in "darkpools" run on alternative trading systems (ATSs), rivals totraditional exchanges whose growth critics blame for lesstransparency in the stock market.

More than a third of U.S. stocks are now traded through darkpools, most of which are run by banks and brokers and often havelower fees than exchanges. Originally aimed at minimizing themarket impact of large institutional orders, dark pools now haveaverage trade sizes in line with those on public exchanges.

ATSs would be required to report weekly volume and thenumber of trades for each security under the rule proposal theFinancial Industry Regulatory Authority (FINRA) filed on Sept.30 with the U.S. Securities and Exchange Commission. Investorscould use the information to better determine where to routetheir orders, said Tom Gira, head of market regulation at FINRA.

In April, Credit Suisse stopped disclosing the amount oftrading volume on its Crossfinder platform, the world's largestdark pool. This raised concerns about the transparency of U.S.equities markets. A spokesman for Credit Suisse was notimmediately available for comment on Tuesday.

"The more good information about the way the market worksthat we can put in the public domain the better, given some ofthe lack of understanding out there," said Jamie Selway,managing director at Investment Technology Group, whichruns a dark pool and voluntarily discloses its volume.

The heads of exchange operators NYSE Euronext,Nasdaq OMX Group, and BATS Global Markets met with theSEC in April to argue that the growth of off-exchange tradinghas creating wider trading spreads, more intraday volatility,and made the market more opaque.

A spokeswoman for BATS said on Tuesday the exchange supportsFINRA's efforts "to try to bring an appropriate level oftransparency to trading that happens away from the litexchanges." NYSE and Nasdaq declined to comment.

Dark pool proponents say the competition the venues providehas kept trading prices on exchanges in line, and that if darkpools did not exist, trading prices would likely be much higher.


There were 91 ATSs registered with the SEC as of Aug. 1,trading in various asset classes. There are also dark pools thatare not ATSs, such as wholesalers and single-dealer platforms.

ATSs bring together buyers and sellers of securities.Wholesalers are market making firms that seek out retail firmsand offer them trading guarantees and price improvement; andsingle-dealer platforms are venues where one side of the tradeis always the dealer that owns the facility.

Many firms own more than one ATS and might also have amarket making unit and a single-dealer platform.

Under current regulations, dark pools have to disclose theirvolumes to a so-called trade reporting facility, which combinesthe data, giving an idea of the amount of trading happening awayfrom exchanges. Last month, that amount was 38 percent. But thedata does not show which firms the trades were attributed to, orwhat types of dark pools were most used.

Under the new system firms would have to use a uniqueidentifier for each ATS when reporting trades. FINRA wouldpublish on its website the stocks traded at each ATS and thevolumes, giving market participants a better idea of what isbeing traded and where. Because trading information can besensitive, the data would be available on a delayed basis.

"It's a step in the right direction to improving thetransparency for the trade reporting facility," said SayenaMostowfi, a senior analyst at research firm TABB Group.

Some of the largest U.S. dark pools are run by banks thatare also some of the exchanges' largest customers. Other darkpools include Morgan Stanley's MS Pool and CitigroupInc's Citi Match.

FINRA has proposed that professional users of the datagenerated by the ATSs would pay a fee to help recover FINRA'scosts, while non-professionals could access the data for free.

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