Another exchange executive has gone on the warpath against dark pools.
Thomas Callahan, an NYSE Euronext executive vice president and head of the exchange operator’s futures business, NYSE Liffe U.S., asked Congress to pressure the Securities and Exchange Commission to reexamine its regulatory regime for alternative trading systems.
“Through so-called dark pools,” Callahan said, “ATS operators have been allowed to create private markets for securities transactions, which the acting co-director of the SEC’s Division of Trading and Markets has acknowledged ‘can harm price discovery and worsen short-term volatility.'”
Callahan was testifying yesterday before a House Financial Services Committee hearing on regulation of the over-the-counter derivatives markets. His remarks are from his prepared testimony.
His comments referenced a speech by James Brigagliano, the SEC’s Division of Trading and Markets acting co-director, of three weeks ago. Brigagliano said the SEC was worried that dark pools could impair price discovery by drawing valuable order flow away from the public quoting markets.
Callahan stressed that ATS operators should be subject to the same regulatory oversight as exchanges. This “disparity” in regulation, Callahan noted, “has placed exchanges at a significant competitive disadvantage.”
Callahan is at least the third exchange executive to publicly question the role of dark pools and off-board trading in general in recent weeks. Last month, Brian Hyndman, a senior vice president with Nasdaq’s transaction services group, told attendees at an industry conference that “retail customers are being disadvantaged because more trading is being done off-board in opaque markets.”
Joe Ratterman, chief executive officer of the BATS Exchange, speaking at the same conference, noted “the upward trend of fewer quotations in the displayed market past some threshold is probably not good for overall price formation.”
The criticism by Callahan of dark pools also follows criticism by other NYSE Euronext executives of exchanges and ECNs that “flash” unfilled orders to dark pools and other anonymous entities rather than immediately route the orders to other public markets.
NYSE Euronext group executive vice president Larry Leibowitz has publicly assailed the Direct Edge ECN for the practice. The exchange operator has also filed a comment letter with the SEC protesting the practice at Direct Edge and other venues.
Not all operators of public market centers view dark pools as a scourge. Bill O’Brien, Direct Edge’s chief executive, not surprisingly sees the broker-operated platforms as complementary to the public books.
“Don’t try to use your regulatory concerns as bogeymans to criticize what is really a competitive market,” O’Brien said at the recent Securities Industry Association & Financial Markets Market Structure conference. “Direct Edge and others have brought more liquidity together than ever before that translates into a variety of benefits including lower transaction costs, increased fill rates as well as increased opportunity for price and size improvement.”
