Sellside and buyside firms are worried that the Securities and Exchange Commission’s proposed plan for dark pool reporting could hurt institutional investors by enabling others to game their flow. The SEC late last month proposed that each dark pool identify its prints in real time.
"There’s significant reservation from the buyside about symbol-specific real-time reporting," said Dave Johnsen, head of equities business development at Goldman Sachs Electronic Trading. "It’s not welcomed by long-term investors." Goldman operates the Sigma X dark pool, the industry’s second-largest.
As part of the SEC’s "Regulation of Non-Public Trading Interest" proposal, issued in mid-November, trades done in dark pools would have to be attributed in real time to the dark pool where they occurred. All dark pool trades already print to the consolidated tape in real time, but are identified simply as over-the-counter trades.
The SEC proposal would reword the language of the Consolidated Tape Association Plan to require that all last-sale prices collected by FINRA include an identifier unique to the ATS.
Under this proposal, all dark pools would have to identify their trades, unless those trades have a market value of at least $200,000. The SEC recommended this exception to its proposed post-trade reporting rule to avoid hurting institutions working big orders.
"Our clients have said that it could introduce potential inconvenience without material benefit," Johnsen said. In his view, certain high-frequency trading shops could benefit more from that information than traditional buyside firms, since the former tend to be more reliant on market data to fuel their strategies. "It could empower that segment of the market more than longer-term investors," Johnsen said.
Morgan Stanley also thinks real-time attribution would affect the ability of institutions to trade quietly in dark pools. "Real-time attribution to a dark pool would impact volume in dark pools," said Andrew Silverman, global co-head of electronic trading at the broker-dealer. "Long-onlies would be less likely to put orders into dark pools," because of information leakage concerns. Morgan Stanley operates two dark pools.
Silverman said he would not mind if dark pool trades are identified as TRF.D dark pool prints in real time. In his view, that would preserve intraday anonymity and give customers some knowledge about whether a trade took place in an ATS or at an upstairs desk.
A recent TABB Group report discussed the buyside’s view of real-time dark pool attribution of trades. The report was based on interviews with 66 institutions.
Institutions, the report said, use dark pools "to protect institutional orders from adverse price movement caused by overexposure in lit markets." Interviews were conducted before the SEC proposed rule changes for dark pools, but the issues were already being discussed in the industry.
The report noted that 18 percent of firms thought some form of dark pool reporting would improve market transparency, although the nature and timing of that reporting would be critical.
According to the report, buyside traders think that "any trade reporting that would identify the specific dark pool should be late enough in time so as to be of little value to the fast-money players." The report noted that "post-market close reporting could offer institutional traders insight as to how liquidity is shifting in certain market names or market centers, while offering little opportunity for gamesmanship."
Kevin Cronin, global head of equity trading at mutual fund giant Invesco, thinks real-time information about where dark pool prints take place would harm institutions. Identifying the source of dark pool prints will benefit high-frequency traders, he said in an Investment Company Institute Web seminar last month. "That absolutely is not good from an institutional perspective," he said.
Whit Conary, CEO of Level ATS, a dark pool operated by a consortium of five broker-dealers, noted that the SEC’s current post-trade reporting proposal, if adopted, could accomplish "the opposite" of the regulator’s goals. "As more blocks are traded in algorithms, there is the potential for more information leakage with real-time, venue-specific reporting of smaller trades," he said. "People can see the small trades and try to figure out whether there’s an aggressive buyer or seller in a particular venue." Conary thinks the SEC should allow buyside firms to opt out of having their orders attributed to the dark pool that executed the trade.
An alternative to real-time attribution of dark pool prints that appears to be gathering industry support is end-of-day reporting of symbol-specific information. Morgan Stanley’s Silverman advocates this position.
Silverman suggested that "fuller granularity" at the end of the day about where trades occurred would be his preferance. "Reporting by each dark pool in the aggregate or by symbol at the end of the day would be okay," he said. "But identifying the actual dark pool in real time could harm investors by signaling predatory traders who are reading the tape."
Goldman’s Johnsen agreed, saying that symbol-specific reporting from dark pools with end-of-day or end-of-week data would be better than real-time data.
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