Dark pools are going to be less dark.
That’s due in part to recently proposed rules from FINRA that will require operators of registered alternative trading systems-also known as dark pools-to report to the regulator on a weekly basis the volume of every security they trade. FINRA would then publish that data on a delayed basis on its website. For larger stocks, it would report the data after a two-week delay. For smaller stocks, it would report the data after a four-week delay.
Behind the rule, FINRA told the Securities and Exchange Commission in a filing, is a need to better police the SEC’s Regulation ATS, which requires ATS operators to publish the quotes in any security once they reach 5 percent of the total. Also, FINRA believes that “publicly disseminating the ATS trading data for equity securities will provide enhanced transparency and understanding into trading activity by ATSs in the over-the-counter market.”
Driving the idea for such a rule are exchanges’ and regulators’ concerns that too much trading is taking place off-board in dark pools and brokers internalization engines. That hurts price formation on the public exchanges. FINRA’s disclosure rule is considered a positive first step in achieving an understanding of the extent of dark pool trading.
FINRA is proposing the relatively lengthy reporting delays so as not to jeopardize the economics of an ongoing trade by prematurely leaking sensitive information. In its filing, the regulatory body indicates the durations of the delay periods are subject to change.
Dark pool operators are in favor of such rules. Speaking at a recent industry conference, a Barclays executive noted that his firm was in favor of the transparency into dark pool operations that any disclosure would bring.
“We want that information out there,” Barclays head of equities electronic trading Bill White told attendees recently at the Investment Company Institute’s annual market structure conference. “We want it disclosed.”
And the buyside agrees. Cheryl Cargie, head trader at Ariel investments in Chicago, said the focus on dark pools and making them more transparent was a positive for the market.
For the most part, comment letters to FINRA welcome the move towards greater transparency, but some queried a suggested cost or levy to recoup costs of the new reporting process.
Several respondents to the dark pool reporting proposal, including investment Company Institute (ICI), a provided of market data and industry onsultancy, and block crossing network Liquidnet, questioned whether a fee should be charged and collected for the data.
Under the current proposal, ATSs would report weekly aggregated trading volumes to FINRA and the number of trades by security, which would be made available to the public on a delayed basis.
Dark pool data would be made available free of charge to non-professional entities, while others would have to pay a fee. The establishment of a market participant identifier, or MPID, would eventually replace the reporting function.
ICI and Liquidnet say the fee seems unreasonable, despite being encouraged by moves toward greater market and off-board transparency.
In its comment letter, Liquidnet’s chief executive Seth Merrin argued that cost of running the reporting function should be incurred by FINRA members.
“FINRA notes that an important objective of the rule proposal is to enhance the transparency of trading activity in the over-the-counter market,” Liquidnet’s wrote. “Making the data available to all users without cost would be the approach that is most consistent with this objective.”
