In the latest issue of Nasdaq OMX Group’s in-house magazine, “Market View,” John Zecca, a Nasdaq senior vice president and its head of U.S. market regulation, called for operators of alternative trading systems, or dark pools, to be subject to the same oversight as exchanges.
“To ensure overall market integrity, it is critical to subject all trading venues, including regulated exchanges and dark pools, to the same rigorous transparency and market surveillance standards,” Zecca said.
He noted that the Financial Industry Regulatory Authority does not receive as much information about the trading activity taking place in alternative trading systems as it does from exchanges. That needs to change, Zecca added.
The official also expressed concern that dark pool operators aren’t required to report in detail their operating rules to the Securities and Exchange Commission. Exchanges must file their rules with the SEC, but broker-dealer dark pools need only provide a description of their order handling process, their customer base and their subscriber requirements, Zecca explained.
“While exchange rules are publicly available and subject to notice and public comment, dark pools submit this more limited information confidentially to the SEC,” he added.
FINRA recently made public the fact that it was taking a hard look at dark pool practices. Zecca noted that he was pleased that FINRA was doing so.
In his report, the official also pointed out that more needed to be done to achieve better cross-market surveillance. The SEC’s proposed Consolidated Audit Trail was a step in the right direction, Zecca said. “Most regulators agree that the quality of surveillance cannot vary by venue,” he noted. “Transparency and complete information aggregated across markets is the best remedy to protect investors.”
Zecca also wants to see the SEC’s proposed Regulation System Compliance and Integrity (SCI) rule covering development, testing, monitoring and reporting of critical trading and systems technology issues extended to all trading venues.
