With a host of proposals on the table relating to alternative trading venues, including real-time disclosure and a controversial trade-at rule, many in the industry are concerned the government could go too far and over-regulate dark pools.
Speaking on an industry panel last Wednesday at a conference hosted by the Securities Industry and Financial Markets Association, several leaders warned that over-regulation of dark pools could have severe negative impacts on financial markets.
Ari Burstein, senior counsel at the Investment Company Institute, said that technological changes have driven a lot of institutional investors into dark pools, and they now want to make sure regulators don’t “muck up the dark pools that are the most beneficial.”
While Burstein recognized regulators have concerns over price discovery, he said under the current market structure it would be very hard to get institutional investors back into lit markets.
The ICI strongly opposes real-time disclosure of dark pool information, though Burstein said the organization would support disclosure on a day-to-day basis, since predatory traders would then not be able to act on that information to game the system.
“As time goes on, the value of that information gets lower and lower to the people we’re concerned about,” Burstein said.
Burstein also rejected the notion of a trade-at rule, which would force brokers who match their orders internally to fill those orders at a significantly better price than is available in the public markets.
William Neuberger, co-head of Morgan Stanley Electronic Trading, called trade-at a terrible idea that would kill all sorts of dark pools.
“I think this was initially encouraged by the exchanges, with the misguided view that it would push a lot of the trades in the dark into the lit markets,” Neuberger said.
If that’s the case, it won’t work, he said, as volume still wouldn’t migrate to the exchanges. Instead, the real victim in his view would be investor choice.
Leonard Amoruso, general counsel at Knight Capital Group, agreed. He said investors should have a choice whether they route their orders to dark pools or lit markets.
We already have an intelligent regulatory regime in place, according to Amoruso, and there are only subtle changes that need to be made to keep pace with evolving technology.
“Our market structure is a very fragile ecosystem, and before we go forward, we have to understand the impact,” Amoruso said.
